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ential treatment the Cuban emergency rate is reduced to 1.2 cents a pound and reverts back to the 1.8 cents a pound after the emergency is declared ended. As with many other agricultural products, imports of tomatoes are large when our domestic production is short and the reduction in tariffs acts as means of protecting American consumers against excessively high prices for a valuable item in their diet.
On fruit juices, dried blood albumen, sheep and lambs, mules and asses, edible berries (fresh), mangoes, black-eye cowpeas, and garlic the duty is reduced by the full 50 percent allowed in the act. Smaller reductions were made on limes, watermelons, green beans, green peas, peppers, eggplant, cucumbers, and squash. In the case of most competing fruits and fresh vegetables the reductions applied only to off-season periods when our domestic supplies are short. All these products enter in small quantities compared to our domestic production and the reductions still leave considerable protection for American producers.
Mexico has granted reductions in her tariff on our agricultural exports all the way from 25 to 75 percent. The total imports into Mexico of items on which the duty is reduced or bound was $3,924,000 in 1939. The most important concessions granted were on lard, wheat, barley, cottonseed, and hops. The duty on bulk lard is reduced from 2.15 to 1.67 cents per pound; for lard in containers the reduction is from 2.99 to 2.33 cents per pound. Our exports of lard to Mexico were $563,000 in 1939. Wheat was our largest single agricultural export to Mexico in 1939 and amounted to $1,314,000. The tariff was reduced from about 56 cents a bushel to about 34 cents. The tariff on barley was reduced from about 22 to 18 cents a bushel ; our exports were $130,000 in 1939. Our cottonseed exports to Mexico were valued at $121,000 in 1939 and under the agreement the duty was reduced from 0.75 cent a pound to 0.56 cent a pound. Hop exports amounted to almost $300,000 in 1939 and the duty was reduced from 2.61 to 1.86 cents per pound. Other products of less importance on which the duty was reduced were milk products, fruits, both dried and fresh, vegetables, and cereals.
As in the case of other South American countries our relationship is largely complementary with imports and exports of agricultural products fitting into different seasonal patterns. A large market for our farm products does not exist in Mexico but our agriculture does benefit from our industrial exports. Trade can be expanded to include more of our farm products only as the level of living in Mexico rises; to the extent that our exports of capital goods help to achieve this, then our agricultural exports may increase.
1. The reciprocal trade agreements have been beneficial to agriculture by expanding exports of farm products.
2. By increasing our exports of industrial products domestic purchasing power for our farm products has been enhanced.
3. Protective agricultural tariffs have been reduced in many cases by the full 50 percent allowed under the act, and these reductions will be beneficial to consumers and users of raw materials in this country.
4. Producers of agricultural products with which imports compete have been protected through the use of quotas and seasonal agreements which limit imports that might unduly depress prices on the domestic market.
5. Special emergency agreements have been made which will help materially in supplementing our war supplies of raw materials and foods. In this connection the 50 percent reduction limit should be removed.
6. The major benefits of the trade agreements will accrue in the post-war world when they can become the foundation for an expanding world trade with expanding economic opportunity. Agriculture as a whole stands to benefit greatly from an expanded world trade because this will remove much of the pressure upon our domestic market from competing products produced in this hemisphere while providing outlets for products of which we have a surplus and great comparative advantage in production.
7. There is no indication that agricultural interests have been neglected; the major criticism of the program might be that many tariffs are still too high for national welfare as a whole and that more emphasis might be placed upon a consideration of consumers' benefits.
III. OBJECTIONS TO LOWER TARIFFS
In light of the fact that the consensus of evidence overwhelmingly indicates that lower tariffs have benefited agriculture as a whole without having cold
any of our protected producer groups down the river, why is it that these groups have so consistently and virulently opposed extension of the trade agreement act? It cannot be simply ill nature and a desire to harm the best interests of the country as well as themselves. Nor can it be simply stupidity because many of these groups are remarkedly astute in devising ways and means of attaining their own ends. The answer appears to lie in a widespread misapprehension of the nature of tariffs and what they really can do for agriculture. After the futility of the Smoot-Hawley Act was revealed by the chaos of the depression, much of this folklore of tariffs should have been destroyed. Reading the volumes of evidence presented at the 1940 hearings on the extension of the act, however, will convince anyone that this folklore is not only not dead but is quite violently alive. It seems worth while, therefore, to briefly outline some of the simpler and more basic misconceptions regarding tariffs that are so widespread that sheep and cattle ranchers, dairymen and sugar magnates, bankers and Members of Congress, yes, even Senators, use them without blushing.
THE SINGLE COMMODITY APPROACH
1. The single commodity fallacy is usually implied rather than expressed. It is the concept that what is good for me is good for all. If I can raise the price of my product by a tariff then all other producers should have the same privilege and we will all be better off.
If there are 10 groups of producers in a country and one raises prices by 10 percent through a tariff, that group is obviously better off at the expense of the other 9; if all can raise their prices 10 percent by a similar action, obviously no one is any better off. Almost all arguments made before the committee were in terms of the effect of a tariff on a single commodity. Actually the effect of an increase or decrease in the tariff on one commodity alone is entirely different from the same increase or decrease taken in conjunction with a large number of similar changes affecting many other commodities. When not only the United States changes the tariffs on a large number of commodities, but other countries lower their tariffs reciprocally, or raise them in retaliation, the single commodity approach becomes even more misleading. Reducing our tariff 50 percent on butter, for example, in conjunction with reductions on commodities dairymen buy, and reciprocal reductions on our exports might result in raising the price of butter and improving the economic position of the dairy industry. The factors that must be considered are these: To what extent was the previous tariff effective in maintaining the domestic price above the world price? To what extent would domestic demand be raised by increased pay rolls resulting from an expansion of exports? To what extent would the increase in exports of other agricultural products such as lard curtail the production of milk (and tend to raise its price) because corn-hog farming is more profitable when exports can flow out? To what extent will the general increase in world trade and prosperity raise the world price of milk? To what extent would costs of production and prices of consumers' goods be affected?
To admit that it is difficult to obtain a correct answer is much saner than to assume an artificial simplicity that will inevitably give an erroneous one. Experience indicates, however, that expanded trade means greater prosperity both here and abroad, and it is better to risk having to make a few adjustments than again risk a chaotic world dominated by economic nationalism. Where adjustments mean economic hardships they can be offset by other means. Commodity pressure group agents, dominated by short-run misconceptions, inevitably fight for higher tariffs and persuade their members that this is for their good. Actually lower tariffs associated with an expanding world trade and full employment at home may be infinitely better.
TARIFFS DO NOT ALWAYS RAISE PRICES
2. Closely associated with the single commodity fallacy is the idea that tariffs are an effective means of raising the domestic price of all commodities. What is good for one is good for another. It is only because of this misunderstanding that corn-hog and wheat-producing States are persuaded to vote for tariffs. Actually commodities that are produced in excess of domestic demand and are exported cannot have their domestic price raised by a tariff. The domestic price is determined by the world price and all our two-price schemes are attempts to get away from this relationship and avoid our actions being neutralized by for
eign countries' antidumping laws. No one has ever yet devised a scheme that will do this. The same solution, of course, is not to follow the path of high tariffs, two-price systems, and nationalistic action but to tackle the problem squarely in the international field. This means working to lower tariffs in other nations that are depressing the world price of our commodities and cooperating with other nations in international agreements.
High tariffs on commodities we export not only fail to protect their prices but they act, particularly in the case of agriculture, to depress the domestic price of commodities we do not export and which, in varying degrees, might be protected by tariffs. Because our high tariffs inevitably cause reialiatory actions and further curtail exports, we are faced either with ruinously low prices or drastically curtailed domestic production. The resources previously producing exports then turn to the production of those commodities not on an export basis, and this tends to increase the domestic supply and lower prices. The fact that the dairy industry inserted a clause in the Agricultural Adjustment Act which restricted increases in dairy cattle is a dramatic illustration of the reality of this relationship and illustrates clearly how one restrictive measure leads to another. In spite of the recent nature of this experience the dairy industry is still opposed to lower tariffs and tied to a philosophy of restrictionism.
Even though a commodity is not produced for export, there is no assurance that a 50-percent tariff will raise the domestic price 50 percent above the world price. This will only occur when imports continue to flow in over the tariff wall. The amount of the increase in price that will result from a tariff depends upon a large number of factors. If the commodity is produced under monopoly conditions, then production can be so adjusted that the price is maintained just below the point at which imports flow in. In this case the tariff is almost a hundred percent effective. These monopoly conditions, how. ever, are almost nonexistent in agriculture.
Where monopoly conditions do not exist, then, a 50-percent tariff that excludes all imports will tend to raise prices for a short time, but producers will increase their output and prices will fall and a new balance between domestic supply and demand will be established and the price · may be anywhere between the world price and the world price plus tariff. Where domestic prices are subject to variations, imports may flow in only when prices are high and the effect of the tariff varies over time.
In the light of the fact that agriculture is extremely competitive, the resources can be moved from the production of one commodity to another, and that may commodities are on an export basis, it is difficult to understand the survival of the faith that tariffs are an effective means of raising prices.
WAGES AT HOME AND ABROAD
3. A third basic misconception is that which is often phrased in these terms: "The high-paid workers of this country cannot compete with cheap foreign labor" or “foreign trade means lowering our level of living to that of the coolie." This is extremely misleading. Illinois and New York have had free trade with Alabama and Tennessee since the formation of the Union and there are large differences between levels of living. England for a century had free trade with oriental countries to their mutual benefit. The automobile industry, paying the highest wages, needs no protection, while the highly protected sugar-beet industry pays such low wages that we have to import Mexicans to do the work. We can produce rice in California, pay $5 a day for wages, pay shipping costs to China, and sell it at a profit where wages could be as low as 10 cents a day. It is not only wages but the relative efficiency of labor in combination with land and capital that determine comparative advantage. Wages become the crucial factor only when other labor is equally efficient and has just as good capital goods and land at equal prices.
ARE TARIFFS “RIGHTS" 4. A rather disturbing belief is that which looks upon the tariff or "the home market" as a "right" given by some unknown deity to a group of producers. The American farmer has the "right" to the American market. The American chemical producers have the "right" to supply the American people. It all sounds very patriotic, but just exactly what does this mean? Any market is simply a group of consumers and the "right" of any particular producer group to a tariff means the “right" to raise prices to the consumer and limit his freedom of choice. If you prefer Argentinian canned beef or Polish ham, you become
an outcast, un-American, and a destroyer of the country that supports you. If you are poor and bought the imported meat because it was cheaper, then you have sold your birthright. In contrast to the producers' attitudes, we might say that the consumer has a "right" to buy what he pleases at as low a price as possible and that to abridge this "right" is destroying a “privilege" of a "free" society. These emotional words, however, serve only to confuse the realities; a tariff that is effective raises prices to the consumer and limits his choice. Essentially a tariff is a method of subsidizing a producer indirectly. Instead of the Government taking the money from the public and paying it to the producer, the producer collects it through higher prices.
In some cases a subsidy for producers of some commodity may be desirable, but a direct subsidy appears more suitable for several reasons. In the first place, it is easier to know exactly what the subsidy costs the Nation as a whole and the cost is borne by the public through the Federal tax system and can be related to ability to pay. In the case of a tariff, it is difficult to estimate its total cost to consumers and the burden is borne through higher prices to everyone without regard to need or income. This is particularly important in the case of sugar and drugs, for example. Also, in the case of a subsidy, it is simpler to establish procedures which prevent it becoming a source of abnormally high profits made at the expense of consumers in general. One of the most important advantages of subsidies is that they do not strangle international trade and they may be gradually withdrawn if and when desirable.
ADJUSTMENTS MAY BE NECESSARY
5. Lower tariffs mean that adjustments have to be made in the case of some industries on which the tariff is effective. It is the fear of these adjustments that makes all protected interests oppose reductions and in many cases the degree of adjustment is exaggerated. In most industries where many firms are producing the same commodity there is considerable difference in efficiency. Some firms are very efficient and make high profits, while at the other end of the scale are the marginal firms that just keep going. Where a downward revision of tariffs does result in lower prices, with no compensation in lower costs, these least efficient firms may be forced to close down while the profits of the more efficient firms are reduced. Where high profits have resulted in excessive capitalization or high land values (these again become a justification for continuing the high prices and tariffs), general economic welfare will be advanced if these values are deflated. While this may be to the public good, it may be very painful for the owners involved and some method of compensation may be desirable. Under the Reciprocal Trade Agreements Act careful selection of commodities and tariff reductions limited to 50 percent of the Smoot-Hawley rate have prevented this problem from arising and the fears of most producer groups are quite unfounded under the present procedure. In all cases of adjustment that arise we must evaluate the general public welfare against the loss involved by that portion of an industry that is least efficient and may not be able to survive under world competition. A long period of high tariffs inevitably creates a few “hothouse” products that cannot survive in the open air and there is no way of avoiding the results of our acts of the past. We either continue to retain them through continuing the tariff or through a subsidy or we let them perish and replace them. In both cases there is a cost, and which is most desirable can only be decided in terms of general welfare and justice. This can best be done by an impartial body that is not subject to political pressure, such as the Tariff Commission."
OBJECTIONS TO SOME ASPECTS OF THE ACT
Instead of attacking lower tariffs in general some claim to support the act but object to certain aspects of its operation. These weaknesses they would remedy with amendments. The commonest ones that were presented at the 1940 hearings have already been repeated again in 1943.
Probably the commonest suggestion is that each agreement be presented to Congress and passed before it becomes law. On the face of it, this seems a democratic and sensible idea. However, experience has taught us that whenever a bill affecting tariffs is brought up for congressional action every high-tariff
12 It is impossible to more than touch upon the major issues in a brief memorandum of this nature. For a more complete and detailed analysis of all the various arguments see chs. V, VI, VII, and VIII in Economic Nationalism and the Farmer. Cited.
interest brings pressure on the representative from his district, and few districts have no protected interest. As a result of lobbying and logrolling, the almost inevitable result is an increase and not a decrease in tariffs. To submit the carefully prepared and closely bargained reductions of our committee, which were arrived at in conjunction with another power, to such a process would destroy the possibility of negotiating reductions on our products. Such negotiations can only be made on the assumption that the agreements made will be respected later.
Suggestions have been made that would give the representatives of producers of commodities on which tariffs might be reduced more influence at the hearings or more time to prepare materials. Here is a fundamental difficulty. Each producer should have time to prepare his case and present it, and under the working of the act he does, unless he needs a long time to prepare his brief. The difficulty is that no single producer is in a position to estimate the effect of the reduction of the tariff on his product, because he does not know what concessions we will get in return nor what other tariffs may also be lowered. All the producer can do is present the single tariff argument with all its weaknesses and then trust the hired representatives of the people to see that he is not discriminated against. Realistically little more than that can be done before the treaty is made. The best protection of the producer lies in his right to a hearing after the agreement has gone into force if the reduction has adversely affected the sale of his product.
Another point of attack has been the use of the unconditional most-favorednation clause, by means of which our reductions in tariffs to one country are generalized to all countries. This, it has been claimed, is giving away something for nothing. However, when we remember that under this treatment any country that lowers its tariffs to another power also automatically extends those privi. leges to us it appears that we are the ones who are getting something for nothing. Actually the most-favored-nation treatment is one means of assuring reciprocity of action between all nations. It puts an end to the competition between nations for special rates and is the best method of obtaining a general downward revision of tariffs between all nations. The alternative is a return to bilateral agreements and the inevitable frictions and controls that develop.
1. The analysis of the effect of tariff changes when more than one commodity or nation is involved is extremely complex and arguments based upon the single commodity approach are often fallacious.
2. Tariffs as a means of raising agricultural prices have been overrated. 3. High-paid American labor can compete with cheap foreign labor.
4. No producer has a “right" to a tariff. If we wish to subsidize some producers this way, of course, we may, but direct subsidies offer many advantages.
5. Where lower tariffs force adjustments the least efficient producers are liquidated.
6. Making the agreements subject to congressional approval would destroy our bargaining power.
7. There is no way in which producers can be given a larger voice in preparing the schedule of changes before the agreement is made because no one knows what the final compromise will be.
8. The unconditional most-favored-nation clause should be retained.
IV. LOOKING TO THE FUTURE
The three previous parts of this memorandum have shown, first, the Reciprocal Trade Agreements Act should be extended because of its importance in facilitating international trade essential to the war; second, that agreements made so far have been advantageous to agriculture as a whole; and third, that many of the arguments used to oppose the lowering of tariffs are based upon fundamental misconceptions of the nature and results of world trade. Apart from its immediate and past importance, however, the extension of the act is even more important as we look to the future.
In the Atlantic Charter the United States together with Great Britain has expressed its approval of a principle that has far-reaching implications in these words:
“Fourth, they will endeavor, with due respect to their existing obligations, to further the enjoyment by all states, great or small, victor or vanquished, of access, on equal terms, to the trade and to the raw materials of the world which are needed for their economic prosperity;".