where you start from and the cost entailed in getting to the next point, and you are raising exactly those questions. You can't saymean it is perfectly unrealistic to say-that this country, with reference to the Canadians, can move in peacetimes, overnight, to, say, complete abolition of trade barriers. That is the question you are putting, you see, and I respond that way.

On the other hand, by careful thinking and implementation we can and could have removed-this is on the other side and I think it is definitely true-or we might have moved much more rapidly in the Canadian picture, although we did the best job on the Canadian agreement. The Canadian agreements stand out as one of the best jobs.

Unfortunately there are almost a billion bushels of feed in Canada which your section of the country wants very badly, and transportation now won't permit its importation. If we had moved it a year or 2 years ago, if we hadn't had the tariffs on barley and oats especiallybut that is one of the losses.

Mr. REED. I know you have given very deep study to this, Doctor. Would you think that in the event, following this war, some move should be made to take over South America as a sort of United States of the Western Hemisphere that we would be able to make that adjustment and set up a free-trade basis, in view of the things that they produce down there?

Dr. SCHULTZ. I would say this: That with the exception of the Argentine and partly Uruguay, we are on very favorable trade relationships with countries to the south. It is fair to say that the tariffs are no longer high or a major barrier to trade between this country and the South American countries, with the exceptions I noted.

Mr. REED. Don't we give them a free market for a large part of their production?

Dr. SCHULTZ. We have done that, essentially.

Mr. REED. Of course, Argentina might be called the granary of the world, with a small population, a very small consumption, and a tremendous output of cereals. I did have those figures at one time in my mind. It is really one of the greatest exporting countries of the world. Dr. SCHULTZ. The Argentine economy also parallels our own. It isn't complementary at all.

Mr. REED. That makes future adjustment between the two countries on anything comparable to a free-trade basis very dangerous to our agricultural interests.

Dr. SCHULTZ. It is much more difficult, because it is not complementary. That is right.

Mr. REED. I think that is all, Doctor.

Mr. COOPER. If there are no further questions, we thank you for your appearance and for the information you have given the committee.

Dr. SCHULTZ. I left a brief statement with the reporter here for the record.

Mr. COOPER. Without objection, that will be included in the record, Doctor.

(The statement follows:)

THE RECIPROCAL TRADE AGREEMENTS AND AGRICULTURE

(By A. C. Bunce, assistant professor of agricultural economics, Iowa State College, Ames, Iowa)

I. WARTIME SHORTAGES

In 1931 Professor Taussig, in reference to our increased imports of agricultural products, made the statement: "A new stage in economic development was setting in: the growing-up of the country to its agricultural capacities.' Suddenly, in 1943, we find ourselves living in a new period of food scarcity. Meats, fats, poultry products, most dairy products, and canned goods are all rationed. From a decade of surpluses we have moved, in the course of 1 year, to serious shortages.

There are several reasons for the present scarcities. In the case of such products as sugar, fats, coffee, and rubber the curtailment of our normal imports is the most significant factor. For canned goods the shortages reflect a scarcity of sheet metal and tin. When we turn to meats, poultry, and dairy products, however, the shortages are not due to curtailed supplies but to increased demand. This increased demand is due to three major factors: (1) The diet of our armed forces is on a higher level than the average civilian diet and contains about double the amount of meat, eggs, and butter. (2) Part of our domestic food production is being shipped abroad for our allies, particularly Great Britain and Russia. In 1943 it is estimated that food for our armed forces (6 to 7 percent of the total population) and shipments to our allies will take about 25 percent of our entire food supply. (3) The third major factor causing an increase in demand has been the rising national income. From $70,000,000,000 in 1939 income has increased steadily and in 1943 it is expected to reach $135,000,000,000. This has meant that people had more money to spend on food. not only because their income was higher, but because they could not spend it on new motor cars, gasoline, refrigerators, plumbing, or radios. Higher incomes have largely been responsible for the shortages of meats, butter, and milk."

Under these conditions our wartime policy for imports is obvious. We should remove all tariffs that act as barriers to imports of needed supplies in order to obtain the food and feed required at as low a cost as possible. Specifically, we should remove tariff barriers to imports of feed grains, oil crops, meats, and dairy products. To the extent that this will increase our imports, the inflationary pressure will be relieved and the control of price ceilings will be made easier. Because people are anxious to consume more at present ceiling prices, increased imports of foods will not result in a lower price on our domestic market. Examples of how the agreements have been used in this direction are presented in part II.

The most important exception is wheat. The Canadian price is low, $0.90, while the United States price is $1.40.3 The tariff on Canadian wheat is 42 cents and imports are limited by a quota. Feed wheat is not limited and the tariff is only 5 percent ad valorem. Both in the United States and Canada there are such large supplies of wheat that 600,000,000 bushels or more could be used for feed purposes and a large stockpile would still remain. In order to move wheat into feed channels, however, the domestic price of wheat would have to be lowered to about $1 a bushel to compete with corn at $1 a bushel. In the case of wheat, therefore, our domestic price policy is preventing a valuable feed from being used to produce the butter, eggs, and pork we need so urgently. Our most constructive policy would be to lower the price of wheat to about $1 to $1.15; allow the farmers to produce any crop they wanted to; and supplement their income where necessary through a direct subsidy. At the same time our tariffs on feeds should be so adjusted that we can draw upon foreign stocks wherever possible. If we reduced our tariffs on feed too greatly the price of feed in Canada would be raised and the present balance between feed and livestock products disturbed in that country if the Canadian Government permitted feed to be freely exported. This

1 F. W. Taussig. The Tariff History of the United States. Putnam, N. Y., 1931 ; p. 14. For a detailed discussion of this problem see Margaret G. Reid, Food Strategy. Pamphlet No. 1 in Wartime Farm and Food Policy Series. The Iowa State College Press. Ames, Iowa, 1943.

3 Prices on March 30, 1943. at Fort William and Minneapolis. The Canadian dollar is currently quoted at about a 10-percent discount or is equal to 90 cents in United States dollars.

would bring pressure on the Canadian price ceilings and tend to raise the cost of meats to Canadian consumers and British purchasers.

This example of wheat reveals several important points in regard to tariff policies: (1) Unilateral action affecting tariff rates and quotas is not desirable when such actions disturb the controlled price level in another nation; (2) imports not used directly for consumption are useful to expand our own production and farm income; (3) increased imports may be considered as a means of offsetting inflationary price rises by increasing the supply; and (4) internal price policies and tariff policies must be synchronized.

(1) Today we recognize that the basic aim in both Canada and the United States is to maximize production and, at the same time, avoid inflationary increases in prices. Canada, however, has stabilized the prices of grains and meat products at a lower level than the United States as well as depreciated the Canadian dollar 10 percent. It is essential, therefore, that changes in our tariff rates be made in consultation with Canada in order to avoid undesirable repercussions in the Canadian economy. The method of making reciprocal trade agree ments is adapted to this present emergency problem and it is essential that it be retained and made even more flexible in order to make desirable adjustments more rapidly.

(2) In the present emergency we should be willing to obtain raw materials wherever we can and, in order to reduce costs and stimulate imports, it may be desirable in some cases to cut the tariff much more than the 50 percent permitted under the present act. The Trade Agreement Act, therefore, should be amended to permit any reductions or increases in tariff rates that are desirable for the better prosecution of the war. Where raw materials, such as feed, are used by agriculture they expand our own output and increase our total agricultural income without raising prices.

(3) Any imports that increase the quantity of foods available at any given level of ceiling prices decrease the pressure to break those prices through blackmarket operations. Where price ceilings are not established, imports have the effect of preventing further price rises. If, for example, we reduce our tariff on Canadian feed wheat, barley, and oats, so that these feeds flow into the United States, the pressure on feed prices in this country can be reduced. A similar result would occur if we released large quantities of our stored wheat for feed purposes, and the price at which we released the wheat would affect the price of corn; if we wished to maintain corn at $1 a bushel so that we can avoid increases in the prices of pork and dairy products, then we would release the wheat at about $1 a bushel also.

Increased imports of feed that will prevent further advances in feed prices in this country are desirable because they will encourage an increased output of livestock products and maintain the present margin of profit without increased prices. While the supply of meat, poultry, and dairy products is not sufficient to provide all that consumers would be willing to buy at present ceiling prices, an increase in supply will not lower the prices; with our present scarcities there is no danger of importing so much feed that our production of livestock products will exceed the market demand.

In order to act to attain these broad objectives, the Food Production Administration and the Tariff Commission must cooperate with representatives of other nations; they must also be given authority to make the necessary changes in rates and quotas to attain the ends of increased production and stable prices. Failure to extend the Reciprocal Trade Agreements Act would further curtail the flexibility that is essential if we are to meet the needs of a war economy that is international rather than national in scope.

(4) The interaction between our internal price policies and our tariff policies is indicated in the previous section. There is, however, a much more fundamental problem of harmonizing our internal price policies and our international commitments. This again may be illustrated by the case of wheat. Wheat is one of our export commodities and, as such, our domestic price must be determined by the world price if we are to continue to sell on the world market. An attempt to develop a two-price system in order to maintain the United States price of wheat above the world price, will be interpreted as dumping by other nations. Just as we object to other nations selling commodities on our market at a price lower than that which prevails on their own market, so do other nations object to us subsidizing exports. And just as we raise our tariffs on imported goods to equalize the difference between the home market and the export price, so do other nations increase their tariffs against our subsidized exports. Either we

must accept the world price for wheat or, if we maintain a domestic price above the world price, we must cut our production to supply only the domestic market. To the extent that we cut the production of our export crops we either leave resources idle or we increase our output of products for the domestic market and tend to lower the internal price level. How serious this problem will become depends upon the extent to which the prices of our farm products get out of line with world prices. Canada has stabilized her prices at lower levels than we have and some groups in this country are in favor of letting our farm prices rise to even higher levels. Such a policy appears to be diametrically opposed to our immediate national interests both in increasing production and avoiding inflation; it is also helping to create a situation in which export surpluses of wheat, cotton, and tobacco will pile up or be sold abroad only at prices completely out of line with other agricultural prices. This will lead again to a demand for restrictive production policies and a shrinking economy. Tariff adjustments can be used to implement a policy of avoiding inflationary prices and maximize production but only when we have adopted internal policies necessary to avoid inflationary prices and maximize production.

CONCLUSIONS

1. Increased imports of agricultural products are desirable to increase domestic production and consumers' supplies, and reduce the tendency for prices to rise. 2. Because consumers will buy more at present prices, increased imports will not lower domestic prices in most cases.

3. Tariffs or quotas that prevent the importation of needed products should be further modified, but changes should be made in consultation with the exporting countries in order to avoid disturbances in their price level.

4. The Reciprocal Trade Agreement Act should be extended another 3 years and the limitation on tariff reductions should be removed in order to facilitate the above adjustments which will materially assist us in waging war.

5. Domestic policies leading to higher prices not only increase the danger of inflation but may endanger our future export position.

II. THE EFFECT OF THE TRADE AGREEMENTS UPON AGRICULTURE

During the hearings on the extension of the Reciprocal Trade Agreements Act in January 1940 a vast amount of material was presented before the Ways and Means Committee. Included in the testimony and placed in the record were a series of economic studies by members of the staff of Iowa State College of the effect of the trade agreements upon American agriculture. The general findings were as follows:

1. Talk by politicians and propagandists to the contrary notwithstanding, nobody has been "sold down the river,” by the trade agreements.

2. Trade between the countries with which agreements had been made had increased more than had trade with nonagreement countries.

3. Increased exports of nonagricultural commodities strengthened the home market for agricultural products by increasing employment and domestic purchasing power. The importance of this aspect of world trade should be more easily understood by agriculture after the present demonstration of the part played by war production in moving from surpluses to scarcities.

4. The farmers gained with all consumers where lower tariffs reduced the prices of imported goods, encouraged competition, and led to greater efficiency of production and exchange.

5. The reciprocal trade agreements halted, and to some extent reversed, the trend of growing economic isolationism within the British Commonwealth, France, and other nations.

6. The use of executive proclamations not requiring Senate ratification has eliminated the old log-rolling procedure when the requirement of a two-thirds Senate majority made a reasonable downward revision of tariffs impossible.

T. W. Schultz, C. J. Shohan, and A. Erickson. Economic Studies of the Effects of the Trade Agreements Upon American Agriculture. Report prepared for the Farm Bureau Federation, Chicago, Ill. Iowa State College, Ames, Iowa. November 1939. Printed in the hearings before the Committee on Ways and Means, House of Representatives, 79th Cong., 3d sess., on H. J. Res. 407. Extension of Reciprocal Trade Agreements Act. No. 12. Pp. 1638-1752. January 25, 1940.

The use of the most-favored-nation clause has the beneficial effect of expanding trade and breaking down international discrimination; the selection of commodities on the basis of the principal exporting country has enabled us to obtain reciprocal reductions in tariffs so that the use of the most-favored-nation policy has not taken away our bargaining power. This report treated the trade agreements with Cuba, Haiti, Honduras, Nicaragua, Guatemala, Costa Rica, El Salvador, Ecuador, Belgium, Brazil, Sweden, Canada, Great Britain. Our agreements with the Netherlands, France, Colombia, Finland, Switzerland, and Turkey were not treated.

Since the above report was issued, a later study of the effects of the trade agreements upon agriculture was published in February 1941; this includes all the above agreements except the one with Turkey which did not go into effect until May 5, 1939, and hence was not operative during the period (January 1, 1936, to January 1, 1939) covered by the study. In this study the percentage increase or decrease in exports of particular agricultural commodities to trade-agreement countries was calculated when the post agreement period (1936-37-38) was compared with the preagreement period (1934-35). The percentage change in the same goods exported to all other countries was also calculated and the difference between these two proportions was attributed to the trade agreements. Thus, if exports of a commodity to trade-agreement countries increased 30 percent in the postagreement period, and increased 20 percent to other countries in the same period, then 10 percent of the increase to the agreement countries was attributed to the reductions in tariffs obtained under the act. In regard to imports this method could not be followed because the reductions in tariffs were generalized under the most-favored-nation treatment; all increases in imports, therefore, were credited to our tariff reductions.

The results of this study are summarized as follows:

1. Exports of farm products (excluding reexports) to countries granting us concessions increased from an average of $37,400,000 a year in the preagreement period to an average of $64,200,000 a year in the postagreement period. This is an increase of 72 percent. Exports of the same commodities to countries not granting us concessions rose by only 12 percent during the same periods. This wide difference indicates that the agreements have been effective in expanding farm exports.

6

2. By making comparisons by countries and commodities through the method outlined above (with special period adjustments made for Cuba and Finland where the treaties went into force much earlier), the total increase in farm exports attributable to trade-agreement concessions was $90,100,000 for the 3 years 1936-38. Distributed by countries and commodities the increases appear as follows:

3. Data for 1939 showed that this increase in exports attributable to the concessions obtained will be $100,000,000 for the 4-year period 1936 to 1939, inclusive.

5 Goodwin, Ellis M. Trade Agreements and Agricultural Foreign Trade. Foreign Agriculture. Vol. 5, No. 2, February 1941. Pp. 61-80.

Ibid., p. 63.