6. Public Policy and the Foreign Sector

6 Public Policy and the Foreign Sector WILSON E. SCHMIDT The Federal Government, in fulfilling its constitutional pre rogative to regulate the foreign commerce of the United States, has persistently pursued uneconomic policies. When it has striven for excellence in international economic affairs, it has too often done so for the wrong reason or has attempted a worthy objective with senseless methods. The government has wasted public funds through inept. policies, and it has caused the private sector to waste its scarce resources as welL There is a fundamental principle that the government has violated: economic progress and national well-being are best served by giving purchasers the maximuIn freedom of choice and by buying in the cheapest market, foreign or domestic. The ideas behind this principle are elementary and well known. When the number of items among which a consumer may choose is· increased, the consumer's well-being is obviously in..

creased. If a man can select among eight-, six-, and four-cylinder cars, his chances are greater for obtaining what best suits his needs and his pocketbook than if he is forced to choose only between an ,eight and a six. An economy that produced nothing but one-family houses would provide less satisfaction to many consumers than one that provided apartment buildings as well. The public sector should maximize its own freedom of choice 107 108 The New Argument in Economics in order to increase, not its own well-being, but that of the private sector, for which the government in effect has a proxy. It chooses among goods and services to provide the people with things which they are believed to want, but which they are unable to supply at all or as efficiently themselves, e.g., national security. In public construction, if private contractors and gov ernment architects were free, as they are not, to choose between foreign and domestic marble or glass mosaics, the opportunity to look abroad as well as at home would offer greater possibilities for pleasing government structures.

By destroying artificial obstacles to international trade, govern ment can give a new efficiency to a nation, and its people will enjoy, as a whole, higher incomes, measured in terms of the physical goods and services available to them. Suppose, for example, that a particular item can be bought abroad for $1 and that, because of a tariff of $.50, the item sells for $1.50 in the United States. Because competition among American enterprises forces equality between prices and costs of production, United States producers will manufacture it, if the item can be produced at all in the United States, at a cost of $1.50, including the normal profits of the producers. That is, it will take $1.50 of United States resources-land, labor, capital, and management to produce the item. In contrast, if the item is bought abroad, it requires only $1 of United States resources; this is the value of the land, labor, capital, and management that must be put into some other product to be exported from the United States to obtain a dollar's worth of foreign currency with which to pay for the imported item. If, by breaking down the barrier to international trade, we were to substitute one imported unit for a domestically produced unit of the tariff-protected product, the nation would save $.50 worth of resources. Instead of devoting $1.50 of resources in order to produce the item at home, we would need only a dollar's worth of resources to obtain it indi ..

recdy by first producing an export commodity and using the proceeds of its sale to buy the imported commodity. As domestic resources are displaced by increased imports, they Public Policy and the Foreign Sector 109 would shift to more productive employments, moving to new activIties in different geographical locations or finding new op portunities as new enterprises move to them. In this way, the total output of the nation would be enhanced, its base for economic growth would be increased, and the .people as a whole would enjoy greater supplies of goods and services, which are the stuff from which real income is made. There are instances in which obstacles to international trade may increase real income, and there are situations in which economic objectives should bow to other national goals, e.g., security. Cadres of American businessmen and labor-union leaders have draped themselves and their industries in the flag in order to justify protection from imports for themselves before Congressional committees and the executive branch, but their arguments have been so often rejected by competent authority -the Office of Emergency Planning has accepted only one plea for protection on defense grounds, and even that decision is widely disputed-that it is hard to justify any widespread trade restriction on the basis of national security.

There are two situations in which trade restrictions can in crease the real income of a nation: where the price we pay to foreigners for their products can be forced down by artificially reducing our demand for them through trade restrictions, and where external economies, broadly defined, prevail. The latter situation is too abstruse to detain us here and, in any event, is nonoperational to such an extent as to be, for the most part, irrelevant to policy. A tariff policy designed to reduce the price paid to foreigners on the things we import suffers in that there is little private demand for trade restrictions that will in fact reduce these prices, because the price decline limits the protective effect afforded to the domestic industry through trade restrictions. The United States Government has shown little dis position to pursue a poliry oriented toward reducing the price paid for imports except in some strategic materials purchases during the Korean War; in the one instance where the policy could easily succeed because of the dominance of the United 110 The New Argument in Economics States in the market, namely, coffee, the government is, at this writing, supporting financially the efforts of foreign suppliers to raise .their prices.

A. The Public Sector The Federal Government, purposely, consciously, and to the disadvantage of the taxpayer, has thrown away the advantages of international trade in its own transactions. 1. FEDERAL PROCUREMENT The Post Office Department, a few years ago, prohibited the purchase of foreign-made office machinery at the same time that it was demanding increased postal rates of the Congress. The Department of Defense is required by law to buy all its food, fiber, and fabrics within the United States, no matter what the additional cost over foreign sources may be, and even if they are to be used abroad by the Department of Defense. The restrictive effect of the law is enhanced by the fact that all the components and subcomponents of the products must be entirely of United States origin. Estimates of the additional cost of this law to the taxpayer may be wide of the mark, because the prohibition on foreign procurement has meant that procure~ ment officers have not been in touch with foreign prices. But the Department of Defense estimates that the difference between foreign and domestic prices in 1958 was big enough to allow a saving of $70 million through foreign procurement, a sum equal to the cost of seventy missiles for the Polaris submarine. This estimate does not include the savings that would be gained on goods purchased for use overseas through reduced transporta tion costs, decreased lead-times, and reduced stocks in the pipeline.

Since 1933, all federal procurement has been subject to the Buy American Act, which forbids foreign procurement for use in the United States, with certain exceptions, specifically, unless the cost of the domestic item is unreasonable. Of course, on our Pub lie Policy and the Foreign Sector III earlier reasoning, the domestic cost is unreasonable if it is higher than the cost of a comparable imported item. But the Executive Branch has chosen to define "unreasonable" in other dimensions. Up to 1954, the domestic price could exceed the import price by 25 per cent plus the tariff on the imported item and still not be regarded as unreasonably high. Inasmuch as this differential was measured against the price of the imported item including tariff, domestic handling, and the cost of domestic components, the differential on the foreign component of the product was often substantially greater than 25 per cent-easily 60 per cent, according to one estimate. 1 In 1954, the Executive Branch rede fined "unreasonable," putting the differential at a minimum of 6 per cent; it could be greater if national defense industries were involved or if the domestic procurement was from an area with heavy unemployment. But the reduction in the differential was ordered in sufficiently loose terms to permit the Tennessee Valley Authority to apply a 20 per cent preference to domestic procurement.

It is exceedingly difficult to arrive at a firm estimate of what the Buy American Act has cost the taxpayer. One estimate, ad mittedly subject to an extremely wide range of error, put the figure at $200 million annually, composed half in higher procure ment costs and half in tariff revenue on imports which otherwise would have been received. 2 The effectiveness of the United States Government procurement policy in restricting imports is sug gested by the fact that in 1958 the ten most important gov ernment agencies spent only 1/20 of one per cent of their procurement funds on foreign goods, and in 1959 only 1/5 of one per cent; 3 in contrast, for the nation as a whole, imports were equal to three per cent of total purchases of goods and services. If aggregate estimates of the cost are difficult, we are on firmer ground in specific cases. In 1953, in the first of the Chief Joseph dam cases, a British supplier underbid domestic producers by $1 million on certain generators and transformers, and, in addi tion, the Treasury stood to gain $600,000 in additional tariff revenues, all this on a purchase involving $6.2 million; but the 112 The New Argument in Economics British supplier lost all but the less profitable transformer con tract. In a subsequent Chief Joseph case, the same British sup plier offered the Treasury a saving of $1.5 million on a trans action of about $6 million, but he lost the contract because of the unemployment exception. Had the selection of bids been delayed only a few months, the unemployment exception could not have been invoked to reject the British bid, because the level of unemployment in the affected domestic area soon fell below the percentage that permitted invoking the unemployment exception.

Indeed, the government works at cross purposes with itself in its procurement policy. This was shown early in 1961, when the General Services Administration, which was established by Congress to cut costs of procurement for the Federal Government, had to plead before a special panel of the Department of the Interior for permission to buy oil in the cheapest market. The United States Government limits, through quotas, the amount of oil that may be imported, and, inasmuch as foreign oil is considerably cheaper than domestic oil, there is a substantial advantage in having a license to import. The General Services Administration was not granted such a license. Consequently, according to testimony of GSA officials, the procurement cost of oil for use in the Washington, D. C., area was increased by $660,000 in 1961.4 The Department of Defense has testified that the oil import program at minimum has cost it $20 million since April, 1959.

The recent gold and balance-of-payments problems of the United States have led to shifts in government procurement policy that have added unnecessarily to the costs of government. For example, late in 1960 the Department of Defense ordered that commodities and services that normally would be purchased abroad for use abroad be procured in the United States if the cost differential does not exceed 25 per cent. This was sub sequently raised to 50 per cent on a wide range of products. Some insigh t can be gained into the significance of these measures if we assume that the differential is collected in the form of money. In that event, they wipe out more than one-quarter of the possible Public Policy and the Foreign Sector 113 reduction in the ratio of customs receipts to imports which might be achieved under the widely heralded 1962 Trade Ex pansion Act, using 1960 imports as a base. The leading case under the new policy concerned the pur chase of coal for United States facilities in Germany. The White House, motivated chiefly by the balance-of-payments problem but admittedly concerned with the welfare of West Virginia, required the purchase of some 440,000 tons of anthracite coal in the United States at an additional cost of $2.8 million over what it would have .cost if bought in Germany. The only voices heard to object publicly to this transaction were those of the American maritime industry-and its Congressional representa tives-who complained that the Kennedy Administration failed to require that the coal be carried in American ships.

While the pressing problem of the United States balance-of payments deficit would seem to support such measures, it is often overlooked that there are economic and uneconomic methods of solving the balance-of-payments problem. To the extent that we meet a balance-of-payments problem through measures designed to expand our exports, we need to restrict our imports less in order to achieve balance in our international payments and receipts; therefore, we can enjoy more of the gains from international trade. Hence, the best solution is a measure or a set of measures that will increase receipts from abroad as well as reduce payments abroad. Furthermore, the optimum solution is one that gives equiva lent stimuli to change all kinds of receipts and payments. For example, if, in the face of a balance-of-payments deficit, we were to restrict the imports of product A greatly while doing nothing about imports of product BJ we would be worse off than if we restricted both A and B to achieve the same total reduction in imports. Suppose that A and B both cost $1 abroad and that we impose a $.50 tax on imports of A to reduce the balance-of payments deficit. In response to the protection afforded by the tax, United States producers will expand the production of A within the United States until the cost of production rises to $1.50. In these circumstances, if we subsequently reduced the 114 The New Argument in Economics tariff on A slightly so that imports of A rose by $1, and if we simultaneously imposed a small tariff on B so that imports of B fell by $1, the balance-of-payments position of the United States would be unaffected, but the country would be better off. By buying one more unit of A abroad to substitute for United States production of A) we would set free $1.50 of United States resources currently producing A in the United States; by restrict ing imports of B by one unit, we would have to employ, depend ing upon the size of the slight tariff on B) slightly more than $1 of United States resources to produce B within the United States.

Hence, there would be a net freeing of United States resources for other uses. As this illustration suggests, selective restriction of imports is an uneconomic method of cutting total imports. A 25 per cent tax on government imports, which is what the new policy amounts to, without a 25 per cent tax on private sector imports, violates the rule of nonselectivity. The optimum measures are those that have effects across the board, giving equal stimulus to the expansion of all exports and the reduction of all imports. The leading examples of these are exchange-rate and/or internal general price-level changes. 2. GOVERNMENT SURPLUS PROPERTY Another area of public waste in international transactions concerns United States Government excess property abroad. Under law, no one purchasing this property can import it into the United States without specific approval by the Department of Commerce, and, from time to time there are disapprovals: over 40 per cent of the applications were rejected in 1960. Since the United States is the largest single area in the world in terms of purchasing power, this law automatically reduces the demand for, and thus the price of, the overseas excess property that the United States Government offers for sale.

The philosophy underlying this law, as displayed by the relevant administrative rulings, is notable for its forthright rejection of the gains from international trade. Foreign Excess Public Policy and the Foreign Sector 115 Property Order No.1 (Revised) states the fundamental criterion for approval of imports, namely, that ". . . . the importation of such property would relieve domestic shortages or otherwise be beneficial to the economy of this country." It further states: "The importation of foreign excess property must have special benefits over and beyond any benefits to be derived in the market place by an added supply of goods and materials through imports." Specifically, "The price at which foreign excess property is acquired, or the price at which it can be sold in the domestic market, will not be considered as an adequate benefit to the economy to justify importation. . ..." 5 3. BARTER In some of its international transactions the United States Government has forgotten the advantages of using money, well known even by the most primitive of peoples for centuries. For example, the United States Government barters surplus agricul tural products for strategic materials. A private contractor pro vides the government with imported strategic materials and receives in return surplus agricultural products that must be sold abroad. Inasmuch as the private contractor is usually a specialist only with respect to commodities on one side of the barter transaction, the barter technique forces him to deal in unfamiliar commodities or obliges him to make arrangements, for a fee, with some specialist in the commodities on the other side of the transaction in order to dispose of them. The result is that the cost to the private contractor of undertaking the barter transaction is increased. As a consequence, the United States Government has been obliged, on a few occasions, to pay more in surplus commodities for strategic imports than if it had bought them for cash. As a rule, however, the government does not like to exchange strategic and surplus commodities at exchange values different from their current market values under cash transactions. But the contractors are loath to bear the extra costs and reduced trading margins imposed by barter. Therefore, the contractors, when commercial business in a particular commodity 116 The New Argument in Economics is active, do not undertake barter transactions for the United States Government. This, however, slows the achievement of the stockpile objectives and retards the disposal of the surplus agricultural products.

Another example of barter is found in the foreign aid program, in which the United States Government transfers surplus agri cultural products to workers in underdeveloped countries in part payment for their labor on economic development projects. Penalties are assessed if the worker finds any of the food in excess of his needs, relative to other products, and therefore sells it. Besides suffering the disadvantages of barter, this pro cedure is exactly the opposite of one means of stimulating economic development: the expansion of the money economy, which facilitates specialization and increases productivity. Against these criticisms it may be contended (1) that the United States surpluses should be utilized by starving people rather than accumulate as shameful abundance, (2) that it is better to store strategic products, which do not deteriorate as easily as the agricultural products, (3) that the surplus disposal program saves us the heavy storage costs imposed on the taxpayer, or (4) that we achieve political objectives abroad at no cost be cause we would not use the surpluses ourselves. However, these points, right or wrong, are irrelevant to the issue at hand, namely, the inefficiency of barter, because all these purposes could be better achieved through cash sales and purchases.

4. FOREIGN AID PROCUREMENT The foreign aid program has provided a number of oppor tunities for the waste of public funds through uneconomic pro curement policies. Until recently, the United States foreign aid agencies, with the exception of the Export-Import Bank, generally pursued a policy of world-wide procurement, buying products wherever they saw fit. But late in 1959 the Development Loan Fund, the major agency of the United States Government at that time for making loans for economic development abroad, shifted to a policy of placing primary emphasis on United States Public Policy and the Foreign Sector 117 procurement. Subsequently the International Cooperation Ad ministration, another foreign aid agency, initiated a policy de signed to shift purchases to the United States. While very little is known about the effects of the shift in policies since 1959, we do know that the government had serious problems in forcing procurement to the United States before the announcement of the general policy in 1959. For example, in 1955 the Foreign Operations Administration, a predecessor of leA, sought to direct a substantial volume of its orders for coal into areas in the United States suffering from labor sur pluses. According to the Department of State: .... innumerable controversies arose as to specifications, allocations, terms, and conditions. Certain areas were picked ou t as a source of supply. This antagonized every State where coal is produced but which was not on the list for procurement. This attitude was uniform, even though the coal could not possibly be competitive in price .....

There were complaints that awards were going to mines employing nonunion labor; that the coal specifications were either too restrictive or not restrictive enough; some States complained that they did not obtain a coal order, while those that were successful complained that it was not large enough. 6 Some of the consequences of domestic procurement were re vealed when the Foreign Operations Administration decided to finance the purchase of locomotives and railway cars for India's railroads. Interest was expressed by the Netherlands, the United Kingdom, France, Belgium, Switzerland, Germany, Italy, Yugoslavia and Japan, and bids were solicited and received. However, because of the strong urging from United States concerns to limit procurement to the United States, agreement was obtained from the government of India that it would procure approximately half in the United States and half in other countries. Additional costs would be borne by FOA. The gov ernment of India agreed, in full knowledge of the fact that it would receive only 5,000 cars instead of the 5,000 plus which they could ex118 The New Argument in Economics pect for $30 million from world-wide sources. Pursuant to this agree ment, an additional $8.5 million was made available by FOA for the extra cost of limiting half the procurement to the United States.

After considerable difficulties, such as additional allowances in price to insure that United States firms used all United-States-made com ponents rather than importing certain parts for assembly, the gov ernment of India received 100 steam locomotives and 5,430 rail cars. . . . . Had the commodities been bought on the bids as originally received, the government of India would have obtained for the $30 million, 100 locomotives and 11,220 cars, and FOA would have saved $8.5 million .... for other important aid to India or elsewhere.7 As indicated by the Indian railway case, to the extent that United States prices are higher than those prevailing abroad for specific commodities needed in the aid program, domestic procurement either forces the foreign aid agencies to give less assistance in terms of real goods and services or obliges the Congress to increase aid appropriations in order to maintain the level of real assistance to be provided. Either there is a reduction in real assistance to foreign countries at the same cost to the United States, or there is an increase in the cost of providing a given amount of real aid. No matter where one stands on the question of foreign aid, this policy does not make sense. Those who favor foreign aid should lament the reduction in real assistance if appropriations are not increased to offset the higher costs imposed by United States procurement, while those opposed to foreign aid can surely argue that, if we are going to reduce the real amounts of assistance provided, we should obtain a tax reduction for it.

The domestic procurement policy reduces the effectiveness of the aid program by limiting the range of projects that can be financed and forcing the donor agencies to select less favorable opportunities for assisting foreign economic development. In particular, projects requiring expenditures of large amounts of the currency of the aid-recipient country to buy resources in the recipient country must be de-emphasized. If we buy the currency of the aid recipient with dollars, it is difficult to assure Public Policy and the Foreign Sector 119 that the dollars that the aid recipient gains will be spent directly in the United States; and when the aid recipient's normal trade patterns are not with the United States, it is difficult to arrange for the import of United States products into the recipient country for sale for the recipient's currency. The chief justification for shifting procurement to the United States has been our difficult balance-of-payments position. The Secretary of the Treasury testified in 1961 that Hthe preponderant part of foreign-aid expenditures will be spent in the United States. Such expenditures, which are accompanied by American exports, have no adverse impact on our balance of payments." 8 This argument for domestic procurement is seriously mis leading. It is true that domestic procurement will expand our noncommercial exports and thereby help the balance of pay ments. However, the expenditure of foreign aid funds in the United States will add to demands upon our economy. It will press prices upward or prevent them from falling further. This will reduce our commercial exports or stimulate imports and indeed worsen the balance of payments. Hence, it is far from correct to argue that foreign aid expenditures, accompanied by United States exports, have no adverse effect on our balance of payments. At any given moment of time, the excess of our exports over our imports equals the difference between our total output and total spending; equilibrium will be restored to our balance of payments only when we raise the ratio between total output and spending in the United States economy. Policies such as domestic procurement, which impose higher costs and reduce our real output and real income, make the necessary steps to obtain the appropriate ratio more difficult.

5. AID AND TRADE INCONSISTENCY Finally, the United States Government policies on foreign aid and on trade are at loggerheads. Between 1949 and 1959, United States imports from underdeveloped countries totaled $57.4 billion, while United States aid to them, exclusive of mili tary assistance, was less than $12 billion. Trade is far more 120 The New Argument in Economics important than aid to the underdeveloped countries in providing foreign exchange. Yet in 1956 the United States Government levied duties on imports from Africa equal to seven per cent of the dutiable imports from Africa, duties equal to ten per cent in the case of imports from Latin America, and duties in excess of ten per cent for imports from Asia, excluding Japan, Australia, and New Zealand. 9 In 1960, the United States Govern ment collected revenues of over $9 million on imports of tropical agricultural and forestry products, chiefly from underdeveloped countries, which were not produced in appreciable quantities in the United States.

Furthermore, because our tariffs on processed goods tend to be higher than those on unfinished products, our tariff structure hinders the development of exports of light manufactures in the less developed nations. In addition, we impose import quotas on a number of products· produced by the poor countries, includ ing such items as petroleum, lead, and zinc, which further depress our imports from them; the quotas specifically mentioned are not simply hangovers from long-past decisions but were actually imposed when the government had fully established its policy of large-scale assistance to the underdeveloped countries. A complete catalogue of United States Government restric tions on imports from the underdeveloped countries is impos sible, but they are numerous and varied. For example, a recent reduction in the tolerance for foreign matter in cacao shipments established by the Food and Drug Administration, after the tolerance had been considered satisfactory for almost three decades, will probably affect adversely the exports of some under developed countries. The government-granted right of collective bargaining may on net balance have harmed the developing nations. For example, the maritime strike of 1961 cost the banana-exporting countries untold millions in income on stems that could not be sold for shipment to the United States because they would deteriorate.

The significance of United States trade restrictions for our aid levels is readily apparent from the estimate that the complete removal of United States import restrictions would increase Public Policy and the Foreign Sector 121 our annual imports from Latin America alone by between $850 million and $1.7 billion; 10 in contrast, the Kennedy Administra tion proposed public assistance of $1 billion to Latin America under A lianza para el Progresso. B. The Private Sector The Federal Government not only has wasted public funds through inept procurement policies, but it also has succeeded in inducing the private sector to waste its scarce resources by restricting its dealings with foreigners. In particular, over 60 per cent of all United States imports in 1960 were subject to extra taxes beyond those that would have been paid if the im ported items had been produced in the United States; in addi tion, there are a number of quotas on imports.

The government has sought since 1934 to reduce our tariff barriers through the reciprocal exchange of tariff reductions with other countries, and these have paid dividends. For exam ple, a recent estimate holds that the 2~ percentage point reduction in duties obtained in 1956 on about $1.7 billion of imports added up to $31.5 million to the real income of the United States.ll However, the government has been exceedingly slow to reduce taxes on trade. After t\venty-seven years, it has reduced the ratio of tariff revenue collected to total imports by 12.8 percentage points, or by .5 percentage points per annum, and part of this reduction is attributable, not to the efforts of the government, but to inflation in the prices of imported prod ucts subject to duties that are fixed in monetary terms. While the authority to reduce tariffs has been extended numerous times by the Congress, the President, to whom this authority is granted, has increasingly been hemmed in by Hfringe protection." For example, alter the war, the law was amended to require the United States Tariff Commission to establish so-called "peril points." These are dramatic labels for those levels below which the President may not reduce a tariff without injuring some American industry. Since these points are determined in secret tribunal, and the Commission has never 122 The New Argument in Economics informed the public of the methods of determining them, there is little that can be said about them. We do know, however, that peril points have been established for imports that had no direct competitive effect in the United States,· and we know that single peril points have been set for so-called basket categories of many items, even though items in the category appeared to differ significantly. Furthermore, the notion that no industry should be injured by tariff reductions is foreign to the ele mentary logic of the case for expanded trade set forth earlier.

One of the advantages of a competitive enterprise system is that the price of progress must be paid by those resources and persons who stand in its way; the forces of the market push them out of their pockets of low productivity. If those who will be hurt by progress can defeat the forces of economic develop .. ment by artificial means, then progress is slowed or stopped. 1. ESCAPE CLAUSE Another element in fringe protection is the escape clause, which was introduced into the legislation early in the last decade. Responsibility was placed on the Tariff Commission to determine if a tariff reduction has caused serious injury to an American industry, and, if injury is found, the Commission recommends to the President that he reinstate stiffer trade re strictions. The clause requires the Tariff Commission, on its own volition or after the complaint of any party: .... to determine whether any product on which a [tariff] concession has been granted under a trade agreement is, as a result, in whole or in part, of the duty or other customs treatment reflecting such con cession, being imported into the United States in such increased quan tities, either actual or relative, as to cause orthreaten serious injury to the domestic industry producing like or directly competitive products .

. . . . the Tariff Commission, without excluding other factors, shall take into consideration a downward trend in production, employment, prices, profits or wages in the domestic industry concerned, or a dePublic Policy and the Foreign Sector 123 cline in sales, an increase in imports, either actual or relative to domestic production, a higher or growing inventory, or a decline in the proportion of the domestic market supplied by domestic pro ducers. Increased imports, either actual or relative, shall be considered as the cause or threat of serious injury to the domestic industry pro ducing like or directly competitive products when the Commission finds that such increased imports have contributed substantially to wards causing or threatening serious injury to such industry . . . . . the terms "domestic industry producing like or directly com petitive products" and. "domestic industry producing like or directly competitive articles" mean that portion or subdivision of the pro ducing organizations manufacturing, assembling, processing, extract ing, growing, or otherwise producing like or directly competitive products or articles in commercial quantities. In applying the pre ceding sentence, the Commission shall (so far as practicable) dis tinguish or separate the operations of the producing organizations involving the like or directly competitive products or articles referred to in such sentence from the operations of such organizations involv ing other products or articles.

As Learned Hand said with respect to another law, "The words he must construe are empty vessels into which he can pour nearly anything he will." The problem was underlined by the Chairman of the House Ways and Means Committee, which is responsible for this clause, when he stated that "as I read some of the provisions, I am at a loss to understand what they mean." 12 And then there is the lament of the Chairman of the Tariff Commission, who explained that in a decision the Commission does not cite previous cases that it has decided ".... because each individual case is so different in this field that there just isn't any precedent." 13 How serious must injury be in order to be "serious injury"? Surely the nation has imposed an immensely difficult task upon the members of the Tariff Commission, for they have four different degrees of injury to interpret: injury, serious injury, material injury, and substantial injury. As the Chairman of the Commission once testified, H ••••we weigh the difference as to 124 The New Argument in Economics what Congress intended between serious injury, which I think is at one extreme and the bare word 'in jury,' which is at the other extreme, with 'substantial' and 'material' in between That is not an easy task to interpret that." 14 And then there is the problem of defining the domestic indus try whose circumstances will determine whether injury has been done. The Commission once voted to recommend a tariff in crease on garlic even though, for the most part, garlic farmers grew it as an incidental part of a vegetable and sugar-beet busi ness and had ample opportunity to increase the production of other crops if they were dissatisfied with the return on garlic.

But on another occasion the Commission combined two separate complaints, tartaric acid and cream of tartar, to report its deci sion, because they were produced by one company in a single plant. And the Commission chose to define the United States meat-packing industry and not sheep raising as the competitive domestic industry in the case of lamb and mutton imports in the form of carcass meat. As the Chairman of the Tariff Commission once testified, "The concept of industry is one of our troubles and one of our difficulties ..... Commissioners will have different opinions on what constitutes the industry." 15 There is also the problem of deciding whether imports have been a sufficiently significant cause of injury when purely domes tic forces are also contributing to an industry's difficulties. In some cases, imports appear to have been made the scapegoat when in fact the principal cause of difficulty in a domestic industry lay elsewhere. For example, the Commission recom mended relief from import competition for the briar pipe indus try when the major cause of the industry's troubles was a shift in consumer preferences away from pipes. It also recommended relief for the domestic spring clothespin industry when the trouble was caused by the development of a new product, namely, the automatic dryer.

The Commission is instructed to employ, as evidence of injury, either an absolute increase in the level of imports or an increase in imports relative to domestic production. If domestic produc tion were rising but imports were rising faster, so that domestic Public Policy and the Foreign Sector 125 producers failed to capture their proportionate share of the expanding market, the Commission could find injury. Injury may be found even if an industry loses something it never had. This involves just about as much injury as that suffered by the man who complains that he lost money on a stock that he failed to buy because it went down in price after he did not buy it. Though it is a sticky point to prove, because so much depends upon the base period selected, these circumstances have prevailed in several cases sent to the President with recommendations for relief. In the acid grade fluorspar and wood clothespin com plaints, domestic production was substantially higher in the last full year before the Commission's decision was rendered than in several, though not all, of the immediately preceding years.

In the stainless steel case, there had been a steady increase in the value of the domestic industry's sales, almost doubling in five years. 2. NATIONAL DEFENSE AMENDMENT Another postwar amendment to the trade agreement pro gram requires the Office of Emergency Planning to hear com plaints that imports are injuring national defense industries. By far the most important of the national security cases to be decided was the -oil import complaint. It displays the problems of the United States Government in restricting imports through quotas; the program of oil import restriction has been in almost constant turmoil since it started in 1959. Some of the chief difficulties have concerned the allocations of the right to import. Inasmuch as foreign oil is considerably cheaper than United States-produced oil, an import license is a valuable right. It is reported that, in a process known as "quota-peddling," com panies have been willing to pay premiums equivalent to $1 or more a barrel to those who had rights to import. After the first allocations of import licenses, no less than one-third of the importer~ complained about the size of the allocations that they received. And there have been almost continuous protests from those who did not receive import rights. For example, only 126 The New Argument in Economics those firms that were importing in 1957 were granted licenses to import residual fuel oil. A number of oil marketers handled imported oil in 1957 but did not receive import licenses because they were not the importers of record, i.e., they purchased the foreign oil from other firms. Hence, they were obliged to buy domestic oil or imported oil at premium prices and to compete with marketers who, by virtue of their import licenses, could buy cheap foreign oil. As the representative of one company testified, ".... elimination of our company from the import program has caused us untold hardship, has cost us nearly a million dollars, and has done us irreparable damage." 16 Later he added, "Suppose that some government administrator told you that, because you lived in a certain house on one side of the street in 1957, you must live there for the rest of your natural life. Would you stand for such a dictate in these free United States? And yet in substance that is exactly what the Oil Import Administration has been dictating to certain oil men during the past two years." 17 At a Department of the Interior hearing early in 1961, con cerned chiefly with the proper level of oil imports and the alloca tion of import licenses, the last witness, appearing close to midnight in a session that started at 10:00 A.M., was sufficiently discouraged by the day's proceedings to say, "If the American way is to take something that we fought like hell for and split it up, somebody says five per cent, somebody says fifteen per cent, and hand this out as a dole, I think it is time we nationalize the oil industry and let the government run everything. How small can we creep? How filthy can we permit ourselves to walk through this?" 18 In a somewhat calmer assessment, the Secretary of the Interior, Stewart UdaB, stated, "I think this is a problem that might very well baffle King Solomon himself." 19 Most, if not all, of the problems involved in allocating import rights could have been avoided if the United States Government had chosen to restrict imports through a higher tariff rather than a quota. The higher tariff would restrict the total volume of imports, but, unlike the quota, would not have restricted the imports of particular firms. Those firms which were willing to Public Policy and the Foreign Sector 127 pay the higher tariff could freely obtain the oil they desired.