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INC., New YORK, N. Y.


New York, N. Y., April 9, 1943. Hon. ROBERT L. DOUGHTON, The House of Representatives,

Washington, D. C. DEAR SIR: Today our foremost object is not only to win the war, but also to win the peace. A sound universal tariff policy would go far toward winning the peace.

The enclosed study and recommendations are meant to serve as a basis for a somewhat novel approach toward an ideal solution of a universal tariff policy, and if this study wins your approval, its mission will have been fulfilled. Very truly yours,

ERIC C. KUNZ, President.

Henry Wallace, Vice President of the United States, ventured an opinion in the New York newspapers of Sunday, Febr ry 28, in which he stated that the third World War would have as its cause bad tariff policies or a bad system of tariffs. At the same time, he advocates the renewal of the present policies of trade agreements, which would indicate that he believes the individual trade agreement policy to be a correct and superior one, better than a one-rate onepolicy tariff for all, without preliminary negotiations.

He must, therefore, have in mind that the present policy, though acceptable, has its faults and its shortcomings, as far as the application of the system is concerned, and I am very much inclined to agree with him.

We can best visualize what remedies should be applied if we first analyze what shortcomings in the system of making the tariff provisions and its rates have been observed, and what faults have shown themselves in evidence during the period of their application.

First : My company, which is engaged in the manufacture of synthetic aromatic chemicals used in the manufacture of soaps, perfumes, medicines, and many industrial products, such as printing inks, rubber, glue, and so on, has experienced the sad fact that in the formulation of the trade agreements now in force, 45 percent of the volume of our business has been affected by lower tariff rates. Our company did not have a chance, nor did our competitors have a chance, to discuss the effect of such a tariff reduction, which in many cases amount to half of the previous protection; we were simply confronted with an unpleasant accomplished fact, after the Government negotiators had concluded the trade agreement.

Second. In more than one case a reduction in the tariff was granted to one country, let us say, at that time the principal exporter of a particular commodity; but the benefactor of this new and lower rate was not that country but an entirely different one, for which the reduction was not meant, who had not asked for it but benefited by it in such a way and in such a proportion as to become the main exporter under the present system of trade agreements. I may mention heliotropine as one of the outstanding products in that class.

Third. The present trade agreements do not limit the amounts of any given article that can be imported, and in many cases we have observed that due to this fact, due to the uncertainty regarding the quantity a foreign exporter is willing to throw on our markets of any given commodity he may choose, very often as little as 10 percent of an imported competitive article ruins the price structure of both the imported and the domestically produced equivalent article to such an extent that any transaction executed therein during the period of the trade agreement becomes a “loss leader." I know of a good many cases in our industry where such loss leaders have been established by foreign importers simply because they feel they have to keep their name before the American public in case they should want to market or are actually marketing other products, for instance, of a patented nature, or in the hope of being able sooner or later to market in the United States products which would bring some return to them. It also enhances their standing as a manufacturer to be able to say that part of their business is for export.

However, such procedure, it appears to me, defeats the very object, the very intention of the lawmaker, that is, Congress, which admitted in 1922 that the tariff should not only be an act to provide revenues but it should take care, through a system of rates and regulations, of the unequal conditions in the cost of manufacture between a manufacturer in a foreign country and the manufacturer of the same article in the United States.

Fourth. It is quite evident that a one-rate tariff can never conform with this principle of equalization of cost of manufacture, since the cost of manufacture in the various foreign countries with which we are dealing and making trade agreements are in themselves vastly different. Certainly the cost of manufacture of a chemical made in Japan must be different from the cost of manufacture of the same or a similar article in Switzerland, in Italy, Spain, or even Germany.

Fifth. One of the thoughts behind almost any tariff, and certainly behind each trade agreement, is to devise an agreement which has a "give and take" idea back of it. It is commonly assumed that if we provide a foreign nation with dollars by purchasing its goods we put that nation in a favorable position to make purchases in the United States with those dollars, and no doubt this principle is correct, at least to a certain extent. Now, if a foreign exporter sends the product of his manufacture to the United States and sells it at cost or below cost, he will not have much of his dollar exchange left, and he will have little incentive to use his dollar exchange for the purchase of American-manufactured materials. It is my opinion, therefore, that we should devise a tariff system which would assure the foreign exporter the sale of his product, and, I may say, the undisturbed sale of his product, so that he may get the full benefit of the market value of his commodity, and in so doing accumulate for himself and for his country a respectable amount of money in the form of dollars which will allow him-and will be an incentive for him—to buy American-produced products.

Sixth: Before the war, and all through the period of the 1920's and 1930's, practically all moneys in the whole world were revalued, not at one time, but gradually. Germany, Austria and the countries which lost the first World War were the first to enter an inflationary period, with a gradual and sometimes complete devaluation of their money. Other countries, like France, followed suit, and even England and the United States found it necessary to promote an inflationary action and change the dollar value to the weight of gold. I ask you: How can a ono-rate tariff, in such periods of time, be applicable to all nations exporting to the United States, and be a satisfactory and fair system of tariff? Yet, we want to do business with each and every nation, no matter in what financial or political situation it may be, as long as it is not at war with us.

Seventh: During the period of the 1920's, right up to today, at any time and at all times have foreign exporters to the United States received from their government encouragement of many types, which are usually called subsidies. They may be direct subsidies, such as a per pound remuneration to the foreign manufacturer by his country for every pound of goods of any given commodity exported. The United States has never indulged in any such practices, and naturally such practices directly defeat one of the main purposes of tariff rates and regulations, which have as their object the equalization of the cost of production here and abroad. I ask you: How can a one-rate tariff, such as we now have or such as we had up to 1936, be fair, adequate and satisfactory to the domestic producers of an equivalent commodity ?

Eighth: It was thought, and naturally it was hoped, by the American manufacturers, that individual trade agreements, such as instituted by the present administration around 1936, would be the proper way, would give the proper opportunity, to our country, our negotiators, to discuss such matters with each country individually, and arrive, with them, at an understanding of what I would like to term "fair play” in matters of imports and exports. You know, and I know, that in certain countries, before the period of trade agreements, and during the period of trade agreements, there was considerable discrimination in the method of dealing with us, by establishment of quotas. These quotas were set up no doubt to permit the import of only a certain amount of any given article coming from the United States. In certain countries, quotas of such a nature were openly announced; in others, they were part of a secret formula in the interpretation and application of the trade agreements with us.

These quotas were established by such foreign countries, not in order to discriminate willingly against American-manufactured goods, for which there was a bigger demand than could be satisfied by the import quotas; they were simply necessary in order that that foreign country preserve its cash, which was needed to prevent inflation, to prepare for war, to pay outstanding bills on products of a less luxurious nature.

Ninth: You know and I know that the present tariff policy, expressed in a system of trade agreements, has made it extremely difficult to combat dumping. In fact, it became so difficult that trade counsellors generally have given up hope and have discouraged starting any action. Here again we have a case where, in the execution of a law and its regulations, the system defeated its own purpose, and a remedy better than the present system should be found for the future regulation of trade between our country and foreign countries.

Tenth. Immediately after this war, unsettled periods of trading with any given nation can be foreseen. The acuteness of the disturbances in the trading will necessarily be the most severe we have ever experienced. There will be devaluation and repudiation of the value of existing monies in foreign nations; there will be misery of an indescribable nature, making for a still lower standard of living than the one experienced before the war; there will be an accumulation and concentration of all possible and imaginary trade disturbances; there will be trade hindrances for longer or shorter periods of time, according to the time needed by each country to put itself on a basis which has a semblance of normalcy.

It will be necessary not only for the foreign countries, but also for us, to work on a budget, regulating our imports and exports, our debts and credits, so that we know at all times what we are doing and where we stand, and so that we, too, will be able, sooner or later, to come back to somewhat normal conditions.

Imports and exports for quite a few years to come, I believe, will be controlled on a national basis, rather than on an individual importers' and exporters' basis. It will be necessary not only because we will have to manage our own affairs very closely, to prevent undue inflation, but also so as not to interfere with any credit in the form of money or goods that this country may feel itself obliged to give any foreign country for its rehabilitation, or on account of charity to those who are now dying of starvation.

Now, as you study these 10 points carefully, and then try to find a policy for táriff regulation, you no doubt will find the policy of individual or bilateral agreements the most satisfactory one, perhaps the only satisfactory one for the period of reconstruction after this war. Conditions in different countries will be vastly different, politically and economically; therefore different rates would have to be established if we should maintain the present system, in order to fulfill what Congress in the past has laid down as the main principles to be observed in the making of tariffs, and particularly for the protection of the American manufacturer, the American industries, and American labor.

As far as a system is concerned, I believe that a quota system, perhaps in conjunction with a minimum and maximum tariff, is the only practical solution, applicable to all countries alike, and capable of taking care of all the intricacies with which the making of a tariff policy and a tariff system is connected.

Now, what is a quota system in connection with a tariff agreeinent? A quota is a definite, predetermined amount of any given commodity, which can be imported during a given period of time into the United States. Usually, a system of licenses obtained by the exporter in the foreign country, or the importer in this country, would be the basis of assuring a satisfactory, uninterrupted flow of the materials.

What is the object of a minimum and a maximum tariff rate, in connection with a given commodity? The minimum rate is applicable to all imports made under the quota, and the maximum rate to imports made outside the quota.

There is nothing new for us in a quota system. We are importing sugar today into the United States under a strict quota. We import cattle under a quota. There is no European country I know of which has not, during the last ten years, applied a quota against importations from the United States.

Statistics show that 60 percent of all imports into the United States pay no duty. They are on the free list. A 100 percent quota would therefore be ap plicable to this class of products. Another 20 percent of all our imports come under a rather low rate of duty-10 percent or 15 percent, based on foreign valuation, and this type of product will continue to come in under a still lower rate of duty, under the quota system.

It is therefore only about 20 percent of all our imports which will be regulated on what will probably be a rather low quota, but that amount which will be imported under the quota system will enjoy a much lower rate of duty than now applies to these products.

A quota system would allow a certain amount, predetermined for 3, 6, 9, or 12 months, of any given commodity which is competitive to a similar American commodity-and I do not want to play with words to enter this country at a low rate of duty, if not free of duty, with a guaranty attached to it that the commodity will be sold in this country at a fair price, not less than the price of a similar competitive American article, if obtainable, and that the money so accumulated will be credited to the exporting nation. This is a system of tariff, I believe, which will satisfy all 10 points enumerated above, eliminating the main ills, the discrepancies, and the shortcomings in our present tariff system, in our present modus vivendi with the nations with which we have trade agreements.

A quota system would predetermine the amounts of any given competitive commodity, which can be imported into the United States within a given period of time and at a definite low rate of duty. As indicated previously, quota systems have been applied by a good many countries in the past against export from the United States to these countries. It might be advisable for the American manufacturer of a competitive article to make suitable arrangements to buy from the foreign producers and exporters part of or the whole quota, and guarantee to the

foreign exporter a remuneration equal to the market price of that commodity in | the United States, less a reasonable allowance for the cost of selling the com

modity, and such expenses as may be involved in clearing, transportation, and in Federal, State, and municipal taxes. Thus, our first objection would be satisfied, to the mutual advantage of exporter and importer.

It can readily be seen that a quota system predetermined for every country with which we have a trade agreement would obviously make it impossible for the country which had been the main exporter to be changed, during the period of the trade agreement, as happened in the case of heliotropine, thus taking care of the second objection.

The third objection to the present system in the execution of our trade agreements would also be met in a satisfactory way, and it would be unlikely, if not wholly improbable, that a predetermined quota should disrupt the American market of any given commodity to such an extent (as is the case at the present time) as to make it wholly uninteresting for both the American manufacturer and importer of that product. Loss leaders would become a thing of the past, and there should be no objection for an American and foreign commodity, competitive with each other, to be sold side by side, at the same price or with the foreign commodity at higher prices, under its own label and subject to the same labeling laws as the domestically produced article.

The present trade-agreement policy, if handled as a bilateral instrument of promoting trade, can take care of unequal econornic conditions which have existed in various foreign countries in the past and will still exist to an even greater extent in the period just after this war, until the whole world will have returned to normalcy.

The principle of the equalization of the cost of production is maintained under this system of quotas, combined with a minimum and maximum tariff rate. However, it will no longer be necessary to exercise this most objectionable feature of our present tariff system, namely, a periodical examination of the cost sheets of the foreign manufacturer-exporter, by United States customs officials. This provision in our tariff regulations has always been considered the most vicious instrument in the tariff system, bearing so closely the imprint of trade-secret spying. How would you, as a possible exporter, like to be compelled to show your cost sheets, your method of manufacturing, which is always reflected in any cost sheets, to the representatives of the 27 nations with which we may have trade agreements?

The objections voiced in our fifth point are justly and squarely met by means of a system of quotas for all imports. All countries which in the past have been buying more than they have been selling to us have continually protested to our Government, to the State Department, or the Treasury Department. Their feelings of reciprocity in trade on an international basis have been hurt. Though it is generally said that these countries only buy from us because they find it advantageous, we must admit that we have lost a great deal of our past trade in cotton and many other products to such countries as the Argentine, India, and so on, not entirely on the basis of a better price, but on the basis of a better reciprocal-trade agreement. Reciprocity, internationally speaking, might well become of considerable importance, and can best be met by us by a system of import quotas. We no doubt all agree that it is unpredictable what value the money of England, France, Germany, not to mention Russia, will have in comparison with the dollar, based on its purchasing power of an ounce of gold, on which basis we are still dealing today and hope to deal after the war. Whatever the inequalities will be, they can best be met and equalized by a predetermined system of quotas. Thus a satisfactory solution would be found for the objection raised in point six.

Point seven, which deals with open or hidden subsidies so many countries have practiced in the past to stimulate their exports, can only squarely and fairly be met again by a predetermined system of import quotas. After all, we should not try to impose on any country a political system which would suit ourselves. I am sure we want to see Russia have her own political system, that best adapted to its country and its people. We do want to trade with Russia, but in order to equalize the vast differences in cost of production, which in one case cannot be determined in the way we have in mind, a quota system is the only proper solution.

Almost every country after the war will be laboring under great stress, as far as the budget is concerned. They will have to establish import quotas in order to preserve their assets and to prevent inflation. It would be difficult for us to tell all these countries : "No, you cannot do that, because it does not suit our present idea of a tariff policy," but we can tell them: “All right, we understand your problem, and we will meet it with the same system, the same methods of quotas, as you feel necessary to apply against imports from the United States."

Point nine, dealing with dumping and its ills, as observed in the past, can find no better solution than in the system of quotas. A tariff or trade agreement of the kind we have concluded in the past with the nations with which we are trading, naturally has to deal with the future, and particularly the immediate future after the end of this war. What economic conditions we will find in the world at that time, we do not know, but a policy of trade agreements based on a system of quotas would take care of all uncertainties which may now be in our mind, or which will come up as soon as this war is over and we again return to somewhat more normal trading between nations.

A trade agreement, a tariff, is a hghly complicated instrument, when it comes to its proper application through the means of our customhouses, our tariff regulations and our tariff courts. It is one thing to establish a tariff policy, trade agreements and quotas, and it is another thing when it comes to the application and execution of these policies and agreements.

There, I believe, we have to resort to the advice and counsel of those experts in that line who have been dealing with this problem of tariffs over a period of years. We have the Tariff Commission, which is constantly studying the question, with a view to improving the executive part of it, the application of the regulations. As indicated before, there is nothing in my proposal which has not bad years of actual application and experience, either in our own tariff system, or applied against us by foreign countries in a most successful way.

The worst that can be said about this new proposal is that it is different from the Smoot-Hawley tariff idea. It is different from the tariff acts and regulations which have been in force during the last hundred years, but times hare changed, and we will be confronted with the most unusual economic and political world conditions right after this war, when any tariff now decided upon will actually take unrestricted effect.

I believe we are little concerned with that part of our imports which are not competitive, and whose manufacture and distribution are probably based on product and/or process patents. That part of our imports constitutes a monopoly in itself, guaranteed by our Government, and should be handled as such.

Needless to say, all observations referred to or suggestions made in this discussion, are entirely restricted to the chemical industry, and in particular to the synthetic organic chemical industry. It is, however, our sincere hope that the representatives of other industries who are interested in tariff regulations will find my proposal equally advantageous for their industries, but they are the ones who can best judge that situation.


New York, N. Y., April 21, 1943. Hon. ROBERT L. Doughton, Chairman, House Ways and Means Committee,

House Office Building, Washington, D. C. DEAR CHAIRMAN Doughton: While we have asked for an opportunity for & representative of this organization to appear before your committee on behalf of the renewal of the Trade Agreements Act, we understand that your calendar is very full and are accordingly submitting the following statement and will be glad to appear in person, if desired.

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