On the other hand, quotas can be employed as an instrument for the liberalization of trade, and in that respect may serve a highly useful purpose. They may be imposed, for example, not for cutting back the volume of imports but for the purpose of removing from imports their most damaging competitive effects. These effects, described below, are the most feared by domestic producers and are the most disruptive of domestic production, employment, and trade. By freeing trade from this fear, quotas may produce conditions that are relatively favorable to imports and their continuation at high levels. Under the most-favored-nation clause a given tariff rate is applicable to all countries entitled to most-favored-nation treatment. Under the United States acceptance of the unconditional form of the clause this means at the present time virtually all countries except those under Communist control. In other words, if the tariff on cigarette lighters is 25 percent this rate will apply regardless of country of origin, with the exceptions noted. The fact is that not all countries stand on an equal competitive level. A tariff rate, such as 25 percent, for example, that would be adequate against the goods shipped to us from countries in which the standard of living approaches ours would in many cases be too low to give similar protection against the same goods coming from lower-standard countries. If, on the other hand, the rate were raised to meet the competition from the latter source, in this instance, say to 50 percent, it might be excessive with respect to goods imported from the higher standard countries. Import quotas are free from this weakness. They could, moreover, be designed to assure to the higher-standard countries a fair share of our importation of given articles, whereas under a given tariff rate they might be at a competitive disadvantage in our market. The tariff need not be increased and in some instances might be lowered or even eliminated when import quotas are adopted. Foreign producers would then enjoy a margin which they could utilize to improve the living standards within their own country. The import quota, if properly designed and administered, will serve its most useful purpose at precisely the time when competitive imports ordinarily in the absence of quotas, do their heaviest damage. Tariffs are neither as effective as quotas under such circumstances unless they are very high, nor do they offer the degree of flexibility that may be achieved with quotas. To be specific, there are times, as in a seller's market, when imports of particu lar products can do little or no damage in our market for the simple reason that the market demand for these products is strong enough to absorb all the domestic supply plus imports at good prices. However, when production plus imports catch up with demand and the seller's market gives way to a buyer's market, imports may inflict a great amount of damage. When prices have reached their highest level and stocks or inventories begin to grow because of declining demand, thus reflecting sales resistance or slowness of consumers to buy, the market becomes highly sensitive and producers begin to exercise caution. The same is true of those who buy the output of producers. A sudden fear of being caught with warehouses full of high-cost stock seizes the producer while the buyer does not wish to load up retail shelves with high-cost inventory. A widespread atmosphere of apprehensiveness is thus created. When imports enter such a field with a competitive cost-advantage the dangers of a market break are intensified. The condition is aggravated under such circumstances by the natural efforts of domestic wholesale buyers, who have a chance of buying from domestic producers or from importers, to buy at the lowest prices. With the weight of growing inventories worrying the producers, the buyers are in the saddle. They are not slow to inform domestic producers that their prices are too high and that imported goods may be had at lower prices. The domestic producers, seeing themselves thus hemmed in, take the first step to protect themselves against heavy losses from a high-cost inventory. They shorten the workweek or lay off employees or do both, hoping (1) to prevent a price cut by relieving pressure from excessive inventory, or (2) to contain the decline if a price reduction cannot be avoided, and (3) to work off their inventory by cutting back production, thus reducing their inventory loss and reaching an adjustment at a new level. Such an "inventory adjustment" may succeed in arresting the deflationary run. In that event no greater damage may be done to the economy than is connoted by the term "recession." As soon as it becomes evident that the downward trend has been arrested and that prices have steadied, producers will recall their workers or, if they have merely shortened the workweek, they will begin again to operate at full time. If domestic producers have control of the situation the probability of thus arresting the deflationary movement is greatly enhanced. If, on the other hand, control is out of their hands, as it will be if imports continue to flow in at an unreduced rate, or if imports take up the reduction in output caused by domestic cutbacks, there will be no way of halting the downward trend and it will soon develop into the well-known spiral that leads relentlessly to a full-blown depression. It is obvious that import quotas can be of inestimable help in efforts to contain the deflationary forces. Quotas will introduce an element of certainty into a field where uncertainty has become enthroned and works its havoc with tyrannical ruthlessness. The use of quotas will enable domestic producers to take into account the effects of a known volume of imports in planning their own production schedules. Furthermore, if the quotas are properly designed, imports will will be called upon to participate proportionately in the decline in consumption by being cut back in keeping with such a decline. Thus, instead of nullifying the efforts of domestic producers to cope with the deflationary forces, by curtailing output, imports will bear their share of the responsibility in reaching an adjustment. Obviously import quotas must be designed with this purpose in view if they are to fulfill this function. With appropriate flexibility that will permit participation in an expanding market as well as in a shrinking one, such quotas will perform the double function of sharing prosperity in a seller's market and neutralizing imports as a deflationary force in a buyer's market. Involved in this design of quotas is a formula that will reserve to imports a stated percentage of the market. Ordinarily imports during a previous representative period would be used as a basis for calculating the share of the market that would be set aside for imports. An example will clarify the formula. Assuming this share to be 15 percent, and assuming further that average domestic consumption during the representative period has been 1 million units per year, then if consumption during the current year were estimated to remain at 1 million units, a 150,000-unit share (i. e., 15 percent) would be set aside for supply by imports. Should domestic consumption increase to 1,500,000 units, imports would be entitled to 225,000 units (i. e., 15 percent of the higher figure). If, on the contrary, consumption should decline to 500.000 units, imports would be held to 75,000 units (i. e., 15 percent of the reduced figure). In cutting the import cloth to fit the market the latter would be protected without imposing unfair restrictions on imports. Protection of domestic producers would come from several sources: (1) The volume of imports would be limited even if established at liberal levels, (2) certainty would replace uncertainty in assessing imports as a market factor and domestic production could thus be planned with greater confidence, (3) pressure on prices from imports would be eased since the foreign exporter could not sell more in our market by cutting his prices, and (4) plant improvements could be made, more efficient production equipment and methods installed by domestic producers, secure in the knowledge that low-priced imports would not disrupt the market and thus convert capital outlays into white elephants. Protection for the consumer would in all ordinary circumstances be provided through the flexible provision which would permit imports to expand in proportion to the expansion of the market. However, a further element of flexibility should be introduced so that emergency market conditions might be met. Domestic production may under certain circumstances fail to maintain its normal level of output. This may happen particularly in the supply of farm products or in the fisheries. Such a failure would ordinarily be reflected in contraseasonal declining inventories and rising prices. In order to protect the consumer against gouging and profiteering, import quotas should be designed for reopening and reexamination under stated conditions of such falling inventory levels and price increases. An additional volume of imports could then be authorized over a stated period of time until the market deficiency was corrected. Further flexibility should also be introduced for greater protection of domestic producers who are caught in the toils of a deflationary trend that does not respond to the ordinary "inventory adjustments" referred to above. Should domestic inventories continue to rise contraseasonally even though prices have fallen, thus indicating a grave maladjustment of supply and demand, it would be desirable to cut back imports in proportion to the curtailment of domestic production. In order to make quotas sufficiently flexible to meet serious economic developments it would be desirable to divide annual quotas into quarterly or even monthly periods. Seasonality in domestic production and in imports could thus be taken into account. Natural seasonal rises and declines in inventories could then be ignored. It is important under these circumstances to distinguish between "apparent consumption" which consists of domestic production plus imports, without regard to inventory trends, and actual consumption, which may be lower than apparent consumption when stocks are piling up. This can only be done, however, when reliable inventory reports are available. "Apparent consumption" would not reflect rising inventories at the very time when the development of surpluses becomes crucial to market stability. Actual consumption would reveal the true trend of consumer buying and would make possible the adoption of preventive measures before deflationary forces gain uncontrollable momentum. The superiority of the import quota over the tariff as a preventive of market demoralization is easily recognized when the slowness of tariff adjustment is taken into account. In addition to this slowness in responding to emergency conditions, tariff rates are not readily tailored to produce desired effects. The competitive levels at which imports from different countries strike the domestic market, together with the difference in the capacity of domestic producers to meet price competition from abroad, make tariff rates uncertain in their effects. The very fact that quota controls were available would of itself introduce a stabilizing market influence. While it is not necessarily the magnitude of import volume that inflicts competitive damage, since a volume equal to less than 5 percent of the market may disrupt it under sensitive circumstances, the availability of a holding device would minimize the characteristic disastrous reactions of markets ridden by fear. When the volume of competitive foreign goods available for shipment to this market at a price advantage is not known or if the volume is known to be high, or to be growing, while the domestic supply is already adequate to market demand, the threat of market disruption and injury contained in such prospective competition soon materializes as actual injury whether imports increase in fact or not-unless, of course, a workable defensive mechanism is at hand. The flexible import quota would provide such a mechanism whereas a tariff rate would not do so unless it were high enough to be known to be distinctly restrictive. In that event the tariff would unnecessarily restrict imports. A quota could accomplish the function of overcoming fear by introducing certainty without dealing too harshly with import volume. It would substitute containment and certainly for the blighting effect produced by the anxiety that goes with a tariff rate not high enough to allay fear, on the one hand, or the highly restrictive effect on imports of a tariff that is obviously high enough to overcome the economic perils of anxiety, on the other. Import quotas are sometimes condemned for throwing trade into a straitjacket; and it is entirely true that they lend themselves to this end. However, the straitjacketing of trade may be accomplished without quotas, and this undesirable effect of quotas may be avoided by the introduction of appropriate flexibility. It goes without saying that under certain circumstances and certain conditions of trade, tariffs are preferable to import quotas. This fact does not, however, rob quotas of their distinct advantages under circumstances such as those described above. For example, it is alleged that existing trade patterns become frozen when import quotas are employed. Of course, to repeat, quotas can and are used in a rigid manner; but they need not be. To avoid this rigidity a certain percentage of a quota may be reserved for flexibility in source of supply (i. e., country of origin) if certain countries would have all the competitive advantages in the absence of such reservations and thus make it difficult for others to break into our market. The very act of setting aside a portion of the domestic market, as suggested above, would insure an opportunity for expanding imports should our market itself expand. Furthermore, if evidence should accumulate at any time indicating the desirability of increasing the percentage share of the domestic market to be offered to imports, public hearings could be called to determine the merits of such a course of action. The administration of quotas may be more complex than the administration of the tariff. However, where the product is homogeneous and readily counted or weighed or measured, quota administration is simplified. Moreover, if the tariff itself could safely be relinquished when quotas are established, double administration would be avoided. Any product that is suitable to the application of a specific or a compound duty would lend itself to quota control. Many such duties already exist in our tariff schedules. That other items would lend them selves to such treatment goes without saying. Even items that are heterogeneous in physical characteristics or highly varied in composition find a common derominator in dollar value and could thus be made subject to quota control. In view of the superiority of the import quota over the tariff in many ascertainable instances, this method of regulating imports should not be surrendered merely because some countries have apparently abused the quota by using it as a highly restrictive instrument. Many instrumentalities that are in common use and performing a highly useful function could be and often are abused. That does not mean that their use should be outlawed. World import trade-Percent of total imports derived from various selected |