Studies in Economic Nationalism

7

U.S. FOREIGN ECONOMY POLICY (1958)*

I

Unless the U.S. wishes to give its export surplus away indefinitely, it should aim either to expand its private overseas investment, or to expand its imports, or both. As will presently be shown, there is much scope for the further growth of U.S. investment, given a favorable international environment, but it is not in itself a substitute for the expansion of U.S. imports: no country has ever been prepared to reinvest all of its foreign earnings on past investments, and add on top of it a new export of capital. This may be typical of a country’s early phase as a capital exporter, but once a sizable foreign investment has been built up (and direct U.S. investment abroad now runs to about $25 billion), an increase in imports is necessary to allow for increasing dividend payments. But neither this fact nor the importance of the U.S. export trade is the final reason for favoring a much more liberal import policy. The ultimate purpose of foreign trade, after all, is not to maintain any predetermined level of exports. It is rather to get imports back in return that will enrich the national economy and benefit the ultimate consumer.

Such benefit will result whenever goods are brought into this country that enjoy a comparative advantage in costs and prices over domestically made products, and this comparative advantage exists in many lines including both raw materials and manufactured goods. The argument that if the U.S. opens its doors to imports it will be “flooded” with cheap goods from overseas because foreign wages are generally lower than U.S. wages is, of course, specious. National wage levels are determined by productivity, and wages are generally high in the U.S. precisely because productivity is high. What is true is that it pays nations, like individuals, to go in for a certain degree of specialization. Indeed, it is through such specialization that all trade has been built up over the years not just between the industrialized nations and the raw-material producing nations but also between highly industrialized countries such as the U.S., Canada, Britain, Germany, and other nations in Europe.

II

The expansion of U.S. imports, however, requires knocking down a whole series of obstacles that now impede their flow into this country. Under the Reciprocal Trade Agreements Act, which gives the President limited power to negotiate tariff changes, the level of U.S. tariffs has undoubtedly been lowered, but the act itself is now hopelessly cluttered up wit hprotectionist amendments. Under its Peril Point provision the U.S. Tariff Commission examines all items on which tariff reductions are contemplated and reports to the President. Under the Escape Clause producers may appeal to the Tariff Commission after tariff reductions have been made, and the commission then makes its recommendations to the President. While these recommendations are not binding on him, it should be noted that both the President and the Commission are bound by the general language of the act, which states that tariff reductions shall not be permitted to continue in effect if they “cause or threaten serious injury to domestic” producers. Since any competition from abroad must cause some injury to someone, this provision is highly protectionist in its effect.

The greatest objection to the Escape Clause in whatever form is, of course, that it introduces a profound element of uncertainty into the whole U.S. tariff structure. Foreign producers usually work many years and invest many millions of dollars to set up adequate sales organizations within this country before their products can make a dent in the American market. At any time this investment may be nullified by Escape Clause action. In addition, foreign producers are up against other hurdles. The Reciprocal Trade Act gives the President power to restrict imports if such goods enter the U.S. in such quantities as to threaten the national security. The Buy-American Act, passed in 1933, forbids government agencies to purchase equipment from abroad unless its price is substantially below (6 or 10 per cent) U.S. prices. Finally, it should be noted that under various agricultural and other enactments, the government is empowered to invoke quotas against foreign products. Such quotas now apply to various types of cotton, rye, and wheat as well as peanuts and butter substitutes, and some industrial producers want the same treatment.

A sensible U.S. trade program should make a clean sweep of these obstructions. Specifically it should (1) eliminate the Peril Point and Escape clauses from present law; (2) liquidate the Tariff Commission, which has become an instrument of protectionism; (3) set up in its place a Tariff Liquidation Board, which would deal with true hardship cases resulting from tariff reductions and, if the facts justified, give temporary compensation for their effects; (4) repeal the Buy-American Act and eliminate the security provisions of the Reciprocal Trade Agreements Act; insofar as specific strategic goods need protection, they should get it directly from the Defense Department in straight military subsidies; (5) eliminate present U.S. quotas, which are infinitely more restrictive and dangerous than tariffs.

These critical and difficult reforms — especially the elimination of U.S. quotas — would pave the way for a still larger step. The great defect of the Reciprocal Trade Act as now drawn is not just its hampering amendments, but the fact that the U.S. can normally reduce its tariffs only as others give equal concessions. In many cases, however, the U.S. would gain by reducing tariffs and trade barriers unilaterally, and its long-term objective should be to dismantle the tariff wall altogether. What is needed is new legislation whose declared aim would be a free-trade policy for the U.S. In carrying out such a policy the U.S. would conclude new trade treaties with other nations that provide certain minimal conditions as a quid pro quo. These conditions need not involve the complete elimination of foreign tariffs; they should involve the gradual suppression of foreign quotas and exchange controls, fair treatment of private foreign investment, American and other, and fair opportunity for private enterprise. Trade with countries having state trading monopolies — including all of Russia’s satellites — would continue, of course, to be regulated and restricted as at present. But the aim of the new policy would be to free up both trade and payments throughout the Atlantic world and with all non-Communist countries, with the U.S. leading the way.

III

Such a change in American commercial policy from one of growing protectionism toward one aimed at complete free trade would have far reaching effects. On some estimates it might raise the level of U.S. imports by $1 billion to $2 billion even at the present level of national income. Insofar as the goods were cheaper than comporable goods made here, they would tend to stabilize the U.S. cost of living and benefit the consumer. They also would provide foreign nations with additional means of payment for a possible expansion of U.S. exports and additional employment in the export industries. But beyond this, a policy looking toward freer trade would help practically and psychologically in resolving three other problems that need to be attacked simultaneously in any reform of comprehensive foreign economic policy. These are (1) the gradual enlargment, were profitable, of U.S. foreign investment; (2) the redirection and reorganization of our foreign-aid program; and (3) the promoiton of full convertibility of other currencies with the dollar.

As to U.S. private foreign investment, expansion for profit has already been considerable. In the decade ending in 1955, the net outflow of private capital from the U.S. averaged $1.6 billion per year. In 1956 and 1957 direct and portfolio investment rose to an average of some $4 billion per year (a figure that includes $1 billion of reinvested earnings abroad which does not show up in the balance-of-payments figures). Large as this expansion has been, it deserves some qualifications. The bulk of our investment has been flowing to Canada, Europe, and Latin America, and only about 15 per cent of it in 1956 and 1957 went to the great underdeveloped areas of Asia, Africa, and the Middle East. And in the Middle East as well as in Latin America a large proportion of our investment goes into the extractive industries — notably oil — rather than into the light and heavy manufacturing industries that many nations say they need.

Hence it is entirely natural that there should be constant discussion of how investment, particularly in these backward areas, can be speeded up, taking the place where possible of U.S. foreign aid. Yet the plain fact is that the answer is largely in the lap of foreign countries.

Confiscation, unfortunately, did not end with the famous Mexican oil seizures. In our day Bolivia has seized foreign-owned tin mines. Nasser nationalized the Suez Canal with impunity. Sukarno has driven the Dutch from Indonesia with large and tragic consequences for his countrymen. Even where confiscation is not outright, many countries — notably Italy, Brazil, and Argentina — have put up the “not wanted” sign with respect to oil development. Finally, many countries that cry most loudly for capital have adopted inflationary development programs which in effect impede rather than promote capital formation.

In the face of all this, U.S. policy, however, need not remain passive. In a speech delivered last autumn in San Francisco, Vice President Nixon stated: “The government of the United States would never presume to tell any other government what its policy should be toward foreign investment, but the owners of private capital will inevitably take note of the investment climate before moving abroad.” The latter statement is, of course, true; the former leaves something to be desired. The U.S. Government has every reason not only to protect its nationals abroad but by every means at its command — both diplomatic and commercial — to impress on foreign governments that if they want U.S. private capital they must earn the right to it. We should make new investment treaties with foreign nations, paralleling our trade treaties, which would lay down minimal conditions for the fair treatment of capital and for the prompt remittance of dividends. Finally, the U.S. might well give its support to the idea promulgated by Hermann J. Abs, German banker, for a new Magna Charta that would seek to protect private investment abroad and set up a new kind of World Court for the adjudication of disputes. In sum, we should stand for the spread and enforcement of international law, and the recognition that private property, domestic or foreign, is basic to progress and to human liberty itself.

IV

This whole effort to stimulate private overseas investment must be accompanied, however, by a thorough reorganization and redirection of America’s foreign-aid program, which is today completely unhinged from America’s long-term objectives. Of the $3.9 billion that the President requested early this year for all forms of foreign aid, about $1.8 billion is mainly for arms to our allies; $865 million is for socalled “defense support” operations, chiefly to help countries like South Korea and Formosa; and the remaining $1.3 billion is variously divided between a requested authorization for a new economic development loan fund ($625 million), technical cooperation ($164 million), and various forms of special assistance.

To begin with, straight military aid, plus most of the “defense support” money, should clearly be taken out of the foreign-aid program entirely and incorporated in this country’s regular military budget. In addition, firm distinction should be drawn between funds requested for obvious political purposes — as in the case of money we are spending in the Middle East to support the Eisenhower Doctrine — and true economic assistance for development purposes. From time immemorial, governments have used money to influence and cajole other governments, and, so long as the cold war lasts, the President and State Department may need a kitty for such maneuvers. But this should not be confused with money appropriated for economic development, which should be kept under completely separate administration.

Once foreign economic aid has been really sorted out in this fashion, rapid progress might be made both in reducing its scope and in using it as a lever rather than as a drag on our efforts to free up world trade and payments. Undoubtedly the newly created U.S. development fund may be able to make some loans that will help recipient nations build what is called the “infra-structure” of economic development — i.e., roads, harbors, health facilities, and the like, which cannot well be undertaken by private enterprise. But there is an enormous difference between making such loans to countries that exercise a due degree of fiscal prudence and giving them to countries that say they need these facilities after they have used up all of their own public funds in building steel mills and other facilities far better left to private enterprise. In his address last autumn at San Francisco Eugene Black noted that today the governments of many underdeveloped nations do need so-called “overhead capital.” But he significantly added: “What government faced with these great tasks has the capacity, financial and administrative, to preempt the directly productive sector [of the economy] as well?” In short, economic aid, to the degree it is necessary at all, should be given on the firm conditions that recipient governments balance their budgets, control credit, and in general obey the well-tested rules that, in the U.S. and other once-poor nations, have allowed economic progress to go forward over the centuries.

This turning about of the whole philosophy of foreign aid, plus the encouragement of private investment, plus the wide-scale reduction of America’s own tariff barriers, would go a long way toward solving the final great problem that confronts our foreign economic policy — namely, the problem of currency convertibility and the lifting of exchange controls.

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