MEMBERSHIP AND PARTICIPATION BY THE UNITED STATES IN THE INTERNATIONAL TRADE ORGANIZATION

FRIDAY, MAY 5, 1950

HOUSE OF REPRESENTATIVES,
COMMITTEE ON FOREIGN AFFAIRS,

Washington, D. C.

The committee met pursuant to adjournment at 10: 40 a. m., in the Foreign Affairs Committee room, United States Capitol, Hon. James P. Richards presiding.

Mr. RICHARDS. The committee will come to order. We will proceed with hearings on House Joint Resolution 236.

Mr. Fred Lazarus, Jr., of the Committee for Economic Development.

Good morning, Mr. Lazarus.

Mr. Lazarus, you may proceed as you prefer.

STATEMENT OF FRED LAZARUS, JR., REPRESENTING THE RESEARCH AND POLICY COMMITTEE OF THE COMMITTEE FOR ECONOMIC DEVELOPMENT

Mr. LAZARUS. Thank you very much.

I am Fred Lazarus, Jr., president of Federated Department Stores, Inc. As a member of the Committee for the International Trade Organization, I submitted under date of January 6 a draft for congressional testimony on the ITO. I am also a member of the subcommittee on International Economic Reconstruction of the Research and Policy Committee of the Committee for Economic Development, and I appear today on behalf of that organization. I have with me Mr. Howard B. Myers and Mr. Kermit Gordon of the CED staff. We are grateful for the invitation extended by your committee to appear before you and explain our views on the advisability of ratifying the charter for the International Trade Organization.

I have distributed to the committee a policy statement by CED entitled "The International Trade Organization and the Reconstruction of World Trade." This policy statement was published in June

1949.

The Committee for Economic Development has recommended that the Congress ratify the charter of the International Trade Organization, provided articles 11 and 12-the articles dealing with international investment—are eliminated from the charter. Behind this recommendation is the CED's philosophy on the reconstruction of international trade.

CED believes that there are three goals toward which any United States program for the reconstruction of world trade must aspire.

These interdependent goals are, first, the preservation of peace and the elimination of the causes of international discord and ill will; second, the safeguarding and extension of free institutions; and, third, the achievement of rising standards of living for ourselves and others. A large and growing volume of international trade, based on national specialization and international division of labor, will foster the achievement of higher living standards throughout the world. And whatever contributes to the realization of a better life for the people of the world also helps to safeguard freedom and to secure peace.

Today we are far from realizing the full benefits of satisfactory conditions of world trade. The depression of the 1930's and World War II were major causes of the disruption of world trade which exists today. The restrictions on world trade today are evidenced by inconvertible currencies, distorted trade patterns, discriminatory trade practices, and the changed economic positions of nations. Some of the trends which have altered the pattern of world trade in the last 20 years could not be readily reversed. But there remains a broad scope for a realistic program designed to expand world trade and to increase its benefits for all nations.

It was to these lines of practical possibility that the framers of the ITO Charter addressed themselves. The ITO Charter is the most comprehensive, and probably the most complex, international economic agreement ever negotiated. It is the product of negotiation by delegates from 56 nations, each with its own set of aims and problems. The charter bears the marks of numerous conflicts of national interest. It is far from a perfect document, from the point of view of any of the participating countries. But in this far-from-perfect world the problem of the participating countries is a problem of whether the charter should be ratified as a constructive step toward a practicable betterment in the condition of trade between nations. This is the problem before your committee and before the United States Congress.

Whether or not the Congress should ratify the ITO Charter is a question of great importance. It is particularly important because of the dominant position of the United States in international trade today; other countries are postponing ratification of the charter until a decision is made by the United States Congress. As long ago as 1945, in a policy statement entitled "International Trade, Foreign Investment and Domestic Employment," the CED urged that the United States should join in creating a permanent international organization in the field of commercial policy. The ITO would be such a major international organization. The commitments a country would assume when it joins the ITO are commitments of great practical significance; the Organization would possess substantial powers to affect the trade policies of its members.

Both the supporters and opponents of the charter agree that its ratification is not a matter to be taken lightly. It should not be ratified out of a sentimental inclination in favor of international cooperation; nations may cooperate for bad ends as well as good. Nor should it be ratified simply because the project for an International Trade Organization was initiated and guided through its many stages by the United States. The charter as it stands is truly a product of

international negotiation; it cannot be attributed to any single author. On the other hand, the charter should not fail of ratification simply because it does not meet all the conditions of an ideal state of international trade, as envisioned by Americans.

The charter must be evaluated on its merits as an instrument designed to expand international trade in an efficient pattern, to remove causes of international discord and friction, and to strengthen and safeguard free institutions.

The negotiators of the charter of the ITO could have followed either of two courses: They could have drawn up a brief statement of general principles, couched in language sufficiently loose and ambiguous to conceal their unresolved differences; or, alternatively, they could have sought to establish, by a process of explicit compromise and accommodation, a comprehensive set of detailed rules to govern trade relations. Wisely, we believe, the second course was chosen. Except in the field of capital investment, the charter makes reasonably clear the nature of the detailed rights and obligations which membership entails. In consequence, no nation can harbor the illusion that the charter is in full accord with its own views and aspirations. As a result, we believe that if the Organization is set up future disputes and recriminations arising from widely divergent interpretations of the charter are less likely to develop than would otherwise have been the case.

In valuating the charter, the Committee for Economic Development found that, in its opinion, the provisions of the charter fall into three classes: Those which are clearly desirable; those which, with their exceptions, escapes, and qualifications, are in part objectionable, but on balance acceptable; and, finally, there is one important series of provisions whose defects appear to outweigh their merits.

The group of provisions which we consider to be clearly desirable comprises the provision relating to "invisible tariffs," the undertaking to negotiate reductions in tariffs and preferences, international cartels, intergovernmental commodity agreements, State trading and export subsidies.

The charter establishes detailed rules restricting invisible-or "nuisance"-tariffs. Since invisible tariffs are often as effective as high tariffs in obstructing international trade, we favor the rules restricting their use.

Each member of ITO must negotiate, on a reciprocal basis, selective reductions in tariffs and margins of tariff preference. This is a constructive step.

International cartels, which limit competition, fix prices and curtail trade, are restricted by the charter. Since many countries have no traditional allegiance to the principle of competition, this section of the charter represents a concession to the American point of view and deserves American support.

The charter establishes rules to limit the use of intergovernmental commodity agrements and to govern their negotiation and administration. We are opposed to commodity agreements in general and in principle, and doubt that they can be made to function successfully, except possibly as a temporary expedient. But many such agreements will continue to be made. We regard the charter's provisions as well designed to check their use and to reduce their objectionable features,

particularly since the charter requires that consuming countries must have an equal voice with producing countries in the agreements.

The charter has two main provisions relating to state trading. First, state trading countries must conduct their foreign trading operations in accordance with commercial rather than political considerations. Second, measures similar to tariff reduction are prescribed for state trading nations. These rules represent a useful first step toward dealing with relations between state trading and free enterprise

countries.

The competitive subsidization of exports is a self-defeating process that is destructive of international good will. The charter limits the use of export subsidies without prohibiting it. This authority, if wisely used, can circumscribe or even banish competitive subsidization of exports.

The group of provisions which we consider to be acceptable on balance consists of the section of the charter relating to quantitative import restrictions, economic development, customs unions, and employment.

The charter sets up a broad rule prohibiting the use of quantitative import restrictions, or import quotas. The import quota is a highly objectionable and widely abused device for trade restriction. The charter makes a number of exceptions to the ban on their use; these exceptions weaken the effectiveness of the charter's rules. But the provisions, in general, are a step in the right direction. And their rejection would leave countries free to use import quotas at their own. discretion.

The use of trade barriers to stimulate the economic development of backward countries is placed under control by the charter. But the use of import quotas for this purpose is sanctioned in some cases, subject to international approval. Because of our opposition to import quotas, we accept the provisions with reservations and with the hope that international approval will be confined to exceptional cases and that future amendment of the charter will further limit the use of trade barriers.

The charter freely allows the creation of new customs unions, but sets up restrictions designed to protect outsiders. This set of rules implies that customs unions always raise the efficiency of international specialization. We do not accept this conclusion, but we do not consider it to be a serious defect in the charter.

Members of the ITO are called upon to take action to promote full employment in their countries. The loose wording and ambiguity of this provision of the charter may cause disagreements among members, but we would recommend its acceptance. This section of the charter reflects the fear of other nations that a United States depression would undermine their own economic stability. But it does not appear to the CED to involve the United States in obligations beyond those in the Employment Act of 1946. And many countries might not ratify the charter if these provisions were eliminated.

This brings me to the third group of provisions, those whose defects appear to us to outweigh their advantages. As I said earlier in my testimony, the Committee for Economic Development considers the provisions of the ITO Charter relating to international investment to be unacceptable. A large volume of international investment is

necessary to foster the development of backward and underdeveloped areas. By the charter's provisions, the United States would be obliged to cooperate in providing funds, materials, equipment, and technology to backward countries. But the charter does not offer us any reasonable and enforceable protection against arbitrary and discriminatory actions by foreign governments. The international investment provisions, as embodied in articles 11 and 12 of the charter, are, in our opinion, worse than no provisions at all. Accordingly, we believe that these provisions should be eliminated from the charter, and that the whole question of the rights and obligations of capital-supplying and capital-receiving countries with respect to international investment should be examined anew in a more appropriate context. Since the United States took the initiative in proposing that the subject be dealt with, we do not consider it likely that most other countries would object to the removal of the two articles.

The great value of the charter lies, first, in the broad general principles it establishes for the conduct of trade among nations; second, in those specific provisions which are consistent with the general principles, and, third, in the Organization it sets up to foster these principles. Although the escape clauses are more extensive than is desirable, they operate in a framework through the Organization to strengthen operation according to these principles and to minimize the operation of the escape clauses.

The success or failure of the ITO Charter will be determined as much by the decisions and interpretations made by the Organization as by the rules of the charter. The Organization will also serve as a forum for the peaceful settlement of trade policy problems. If the ITO is used not to strengthen the charter but to sanction the wider use of measures which would curtail and distort international trade, the United States, after the initial 3 years, would be free to withdraw. As your committee knows, many sincere and intelligent persons and groups feel that the Congress of the United States would be unwise in ratifying the charter. We believe that many of the objections to the charter are valid. As I have noted, we have a number of objections ourselves. A great number of the objections, however, are directed against the escape clauses to various rules which in themselves are desirable. The CED feels that the charter must be looked at coldly and objectively for what present circumstances have forced it to be, not for what we wish it could have been.

I would like at this point to take up some of the objections to the charter which have been most frequently made.

Perhaps the strongest criticism of the charter rests on the belief that it sanctions and gives status to the use of restrictive trade practices. There is no question that the charter, through its many escape clauses, permits nations to engage in certain restrictive practices. But these practices are being followed by a great number of nations today, for reasons varying from the maintenance of full employment to the protection of infant industries. These restrictions on the free flow of international trade may not be permanently embedded in the world economy, but they are established facts in the world of today. We agree with the critics of the charter that perhaps there are too many allowances for practices which conflict with the purpose for which the charter was negotiated. But the conditions which led to