ican Congress has done little as yet to change the fundamentals of the post-war foreign commercial policy of the United States. This anomalous situation cannot last much longer. The time has come to convert words into deeds. As a matter of self-interest the United States must immediately take steps to formulate a long-range commercial policy.

II. THE PRINCIPLES OF A NEW FOREIGN TRADE POLICY

The committee considers tariff revision to be an essential contribution to domestic recovery. In many instances the present tariff constitutes a tax upon the Americn people as a whole for the protection of specially favored groups. Dr. Mordecai Ezekiel, economic adviser to the Department of Agriculture, recently stated that only 8 million out of the 50 million gainfully occupied workers in 1929 has been employed in industries which received any direct benefit from the existing tariff. President Roosevelt, in his message to Congress of February 8, 1934, called attention to the statement that the sugar tariff annually cost the American people $200,000,000, while the value of the annual output of the domestic sugar interests protected by this tariff is only $60,000,000. Two even more extreme examples may be cited. A 90-percent duty is imposed today upon the importation of embroidered linen handkerchiefs. Nevertheless only 90,000 such handkerchiefs were produced within the country during 1931 in comparison with 2,266,000 which were imported. Similarly, in order to protect an olive-oil industry providing only 2 percent of the total domestic consumption, American consumers paid out in 1931 over $5,000,000 in duties, or the equivalent of $17 a gallon on the amount locally produced.

Ostensibly the tariff is to "protect" American industries. But a form of protection which requires the exclusion of foreign goods needed to pay for our exports defeats its own end by penalizing efficient industries in order to maintain inefficient units. As a consequence the American people have been forced to reduce their standard of living to protect groups which should be more profitably occupied elsewhere.

The present administration has made a determined effort to correct those aspects of our economic and financial system under which certain groups have profited at the expense of the American public. This task will not be completed until the tariff is revised so as to make it a truly national instrument for the general welfare rather than for sectional or special privilege.

Against free trade. The committee cannot recommend the adoption of free trade or even a wholesale and indiscriminate slash in American tariff schedules. The economic structure of the United States has been developed under an increasingly protective system, and there is greater danger that the immediate and general removal of such protection would produce industrial chaos.

The cost-of-production principle.—Neither can the committee recommend the continuance of the comparative cost-of-production principle. Under the Tariff Act of 1930, tariff rates are supposed to be adjusted to equalize the costs of an American producer with those of his foreign competitor. In the opinion of the committee, this principle is unsound for four reasons:

(1) It erects no standard of protection as to what industries should be protected from the standpoint of the national interest.

(2) It results in protecting the producer no matter how inefficient he may be, without regard to the interest of the consumer or of the worker. It is a striking fact that today some of our most highly protected industries, such as the production of sugar beets, pay the lowest wages and have the poorest working conditions. (3) The literal application of the principle as between American and foreign producers would mean the virtual cessation of all international trade. So long as tariff legislation rests upon this principle, the President will not be able to conclude reciprocity agreements providing for the exchange of goods which can be produced more cheaply at home for those produced more cheaply abroad.

(4) It is impossible in practice accurately to determine differences in costs of production. The attempt to ascertain such costs in foreign countries has led to international irritation; while costs between various units within the same industry in the United States, as well as abroad, vary so greatly that it is difficult to strike an average which means anything. A tariff rate, moreover, which is based on the so-called "average cost of production" enables the low-cost units to make an excessive profit.

For these reasons the committee believes that Congress should set aside the comparative cost-of-production principle and establish a new basis for tariff legislation.

A tariff policy based on national interest.—The committee believes that the time has come to take a new view of our foreign-trade policies. In the past, legislation

governing our trade relations with other countries has been framed by the pull and haul of special industrial and sectional interests. The committee believes that in the future each and every part of our commercial policy should be based upon a carefully formulated determination of the interests of the Nation as a whole. This national interest, for example, demands a policy in foreign trade designed to bring about a more equitable and stable relation between agriculture and industry at home.

In the view of the committee, the national interest requires also that foreign markets should be sought for those branches of agriculture and manufacture which can and should produce in excess of domestic requirements. In order to receive payment for such exports and to raise our standard of living, tariff duties should be lowered upon those commodities which from the standpoint of the national interest may be more advantageously purchased abroad.

To determine what duties should be lowered, the Government should make a thorough study of every branch of American industry and agriculture, taking into account the number of workers employed, wages paid, capital invested, and profits of each industry. Likewise, the question should be studied whether a given industry or branch of agriculture is economically suited to the country, whether it is possible to find cheaper sources of supply elsewhere, and whether the industry is important from the standpoint of national defense. Upon the basis of this and other data, which in large part the Tariff Commission already has in its possession, the Government should decide where protection should be continued or increased, and where it should be reduced or withdrawn. It would seem clear, for example, that such protection should be withdrawn from industries which despite a long period of protection provide only a small percentage of the requirements of American consumption, or in which the annual cost of protection to the American public is excessive in comparison with the value of the output of such industry. Should it be established that a protected industry is making swollen profits, charging monopolistic prices, or giving unsatisfactory service generally, the tariff protecting that industry should be lowered if not abolished. In other words, the tariff should be employed for protecting the American people against domestic monopolistic abuses. Any industry which continues to receive protection should meet certain requirements with regard to efficiency, profits and treatment of labor. The question should be carefully studied whether protection of those industries for which it is deemed desirable could not be more cheaply and effectively extended through a subsidy than through a customs duty.

In working out a new commercial policy, the Government should study the possibility of seasonal tariffs. Thus, fruits and other foodstuffs might be imported under a reduced duty during the months of the year when similar domestic products are not being marketed within the United States. In return, other parts of the world, particularly countries south of the Equator, might import during their off-season American fruits at a reduction in the regular duty.

Balance of payments and triangular trade.-In laying down principles for a future foreign trade policy, consideration should be given to the necessity of establishing a sound equilibrium in our national balance of payments. The country must frankly face the fact that its foreign loans cannot be paid except by goods and services, and that, if the United States does not wish to accept such goods and services, it must be prepared to wipe out its foreign investments, Although the committee believes that the general balance of payments of the United States should be considered in laying down a future foreign-trade program, it is opposed to a general policy which would attempt to balance off exports to and imports from any individual country. In a few exceptional cases, notably that of Argentina, it is highly desirable to increase our purchases for the purpose of more nearly offsetting Argentina's large imports from us. Nevertheless, the

adoption of a general principle of balancing exports to and imports from individual countries would destroy the so-called "triangular trade "of the world and thus materially reduce international commerce. A sound equilibrium between the exports and imports of the United States may be established without doing injury to this triangular trade. The committee believes, moreover, that it is possible to conclude reciprocity agreements without disrupting such trade.

Reciprocity. The final question of principle to be decided is whether the United States should undertake tariff revision unilaterally or in concert with other nations. The committee has examined the argument that the United States should proceed with the revision of the tariff and the adoption of a foreigntrade policy regardless of the outside world. Those who support this view contend that the reduction of the tariff by the United States would at once revive economic forces not only at home but abroad, that the example of the United States would be quickly followed by other countries, and that an increase of

imports by the United States would inevitably be followed by an increase of exports. The fear is expressed that, should the United States make tariff revision dependent upon reciprocity, the result might be that the United States would become involved in a series of trade wars. Such has been the experience of leading European nations applying the reciprocity system. Moreover, under a reciprocity policy there would be a tendency to increase tariff duties for bargaining purposes and to penalize nations unwilling to enter into commercial arrangements, so that the net result of reciprocity might be an increase of trade barriers. The Ottawa agreements, concluded in August 1932 between the United Kingdom and the British Dominions, are cited as an example of this tendency.

Notwithstanding these arguments, the committee supports the principle of tariff bargaining because it believes that in the present political situation the mere unilateral reduction of the tariff by the United States would not bring about corresponding reductions on the part of other countries, nor stabilize and equalize relationships between agriculture and industry at home.1

In order to avoid the dangers of tariff bargaining, the committee believes that reciprocity should be employed only for the purpose of increasing trade. It also believes that with certain exceptions the unconditional most-favored-nation clause should be retained. The exceptions to this clause which the committee favors are that it should not apply to customs unions, nor to multilateral agreements open to all upon equal terms for the reduction of trade barriers. Also, it might be desirable to guarantee the benefits of this clause only to those states with which reciprocity agreements are in existence. If 20 states, for example, make trade agreements with the United States, they should all be given unconditional most-favored-nation treatment by the United States; should 10 States fail to make such agreements with the United States, they need not be given such treatment if they unduly restrict American trade.2

Without approving the principle of quotas as the normal and general method of regulating foreign trade, the committee recognizes that there may be cases in which quotas will be found desirable for limiting the quantity of goods upon which given tariff reductions are to apply. Allowing imports above that quantity to be admitted subject to the payment of higher duties would prevent the quota from being merely an instrument for reducing trade. The quantitative allocation of the market between domestic production and imports should be used only in exceptional cases of standard competitive commodities of which a substantial production in the United States has been developed and which it is not desired unduly to disturb.

III. FOREIGN TRADE PROCEDURE

A governmental tariff agency. Whether these principles will bring about the orderly development of the export and import trade of the United States will depend largely upon the nature of the tariff-making authority. Hitherto the fixing of tariff rates has been regarded as a prerogative of Congress, and the result is well known. Individual Congressmen are subject to great pressure from local economic interests desiring protection, and the tendency has been to trade votes, thus bringing about a general increase in duties with little or no attention to the interests of the country as a whole. The committee expresses the earnest hope that Congress will never undertake another general revision of the tariff. It believes that Congress should define the principles of future tariff policy and establish agencies for their execution. But a plan calling for scientific tariff revision involving the study of the effect of given tariff duties obviously must be carried out by the executive authority assisted by persons qualified by experience and knowledge. In view of the fact that in many foreign governments the executive has the power to change duties, the United States will remain at a disadvantage in international trade until Congress delegates tariff powers to the President. The committee is unanimous in believing, therefore, that Congress should define the principles of future tariff policy, but that it should delegate to the President, within limits, the application of these principles. Thus the President should be given power to change the tariff, fix certain quotas, and conclude and put into effect reciprocity agreements.

A question arising in this connection is how to hold the President responsible for the proper exercise of these tariff-making powers. With this end in view, Congress, in addition to its right of terminating the exercise of these powers, should erect the following safeguards:

(1) It should define the general principles which should govern the tariff-making authority.

1 Mr. Garfield makes a reservation that he cannot support tariff bargaining as a principle. 2 Mr. Warburg dissents from this paragraph.

(2) It should require the President to apply these principles only after investigation and report by a reorganized Tariff Commission or other administrative body.

(3) It should require an annual detailed report from the President and the Tariff Commission.

The committee has discussed the desirability of having the Government provide for a further coordination of information and policy with regard to foreign trade matters. It favors such steps as conducive to the development of a more consistent commercial policy in terms of our national interest, provided that the obvious danger of unduly emphasizing exports is avoided.

IV. FINANCIAL PROBLEMS

Currency depreciation. It is generally recognized that the competitive currency depreciation between leading countries during the past few years has seriously disrupted orderly international trade, increased animosity, and provoked retaliation. The enactment of the Gold Reserve Act of January 1934 by the United States may ultimately be a contribution to exchange stability. The depreciation of the American dollar has, however, automatically led to more than 65 percent increase in the cost of imports from gold-standard countries-a barrier which will continue to exist until American prices have correspondingly risen or further depreciation in foreign currencies occurs. The additional obstruction to international trade thus imposed cannot be offset by a small reduction in tariffs and must ultimately react against American exports. Although the currency problem is too intricate to be discussed here in detail, the committee desires to point out that future tariff reductions should take into consideration the extent to which import trade has been handicapped by depreciated currency. The committee believes further that the development of international trade upon an orderly and mutually advantageous basis depends upon the conclusion of an international currency agreement.3

Exchange controls. The control established over foreign exchange by numerous countries has served to obstruct international trade as much perhaps as tariffs and quotas. As a result, American exporters, find that large sums due them in foreign countries have been "frozen." Naturally these exporters desire to secure payments before they embark upon new enterprises. The fundamental solution of the problem of exchange control lies in resuming the purchase of goods from debtor countries and in establishing a sound equilibrium in the balance of international payments. Once the American Government commits itself to this fundamental position, it may be desirable to convert these "frozen" credits into long-term loans. Since payments due on other outstanding indebtedness also condition the exchange available, these should be funded in accordance with the capacity to pay.

Export credits. While the committee realizes the desirability of resuming international lending under certain conditions, it wishes to point out the danger involved in a widespread extension of export credits before the Government has definitely developed a sound commercial policy as a whole. The danger is that the Government may encourage exports by easy credit while doing nothing to stimulate imports. If such is the result, we shall merely be reverting to the disastrous course followed in the past. There is the further danger that governments may compete with each other in extending cheap credits to their respective exporters which would create the same havoc and animosity as competition in depreciating currencies.1

3 Mr. Warburg makes the reservation that "the development of international trade depends on the reestablishment of an international monetary standard and currency stability."

Mr. Ewing makes the following reservation: "An honest dollar once established and properly and automatically regulated on index figures of basic commodities at their world prices, with proper allowance for location and transportation, would put a stop to gambling in foreign exchange. Such a dollar would not only greatly foster trade relations with other countries but help us in arriving at a fair adjustment of foreign debts. It is a fallacy to think the United States has to wait on any other country to establish an honest dollar. The most important use of foreign trade is to help overcome the wide disparity here at home between our livestock dollar, our farm dollar, our industrial dollar, and our labor dollar."

4 Mr. La Follette makes the following reservation: "I cannot join in all recommendations as to foreignrade procedure. There are other expressions I do not agree with. It is essential to restore the volume of exchange of goods and services, foreign and domestic. The measures recommended are generally sound as immediate steps.'

Mr. Soule makes the following reservation: "The measures here recommended are desirable as immediate steps. As long, however, as our internal economy is not socially planned and controlled there will be grave danger that any type of foreign-trade regulation will be carried out in such a way as not to conform with the basic policy which the committee approves. Tariffs may be adjusted or quotas may be set so as to favor special interests, to the detriment of the needs of the people as a whole, when the authority rests with Presidents and commissions as well as when it rests with Congress. It should also be pointed out that if our internal production were socially planned and controlled, the best solution of the foreign-trade problem would be in some form of government monopoly, which would obviate all necessity for such clumsy expedients as tariffs or quotas.'

SUMMARY OF RECOMMENDATIONS

1. Tariff revision is an essential contribution to domestic recovery.

2. A new tariff policy should be based upon the interest of the Nation as a whole. Such interest demands a foreign-trade policy designed to bring about a more equitable and stable relationship between agriculture and industry. It also requires that foreign markets should be sought for those branches of agriculture and manufacture which can and should produce in excess of domestic requirements.

3. Since an increase of imports is essential to development of foreign trade, protection should be withdrawn from industries which, despite a long period of protection, provide only a small percentage of the requirements of American consumption, or in which the annual cost of protection is excessive in comparison to the value of their output.

4. The Government should study the possibility of seasonal tariffs.

5. A new foreign-trade policy must be such as to establish a sound equilibrium in our national balance of payments.

6. The tariff should be revised by means of reciprocity negotiations; but, in order to avoid the dangers of tariff bargaining, reciprocity should be employed only for the purpose of increasing trade.

7. The unconditional most-favored-nation clause should be retained with certain exceptions.

8. While Congress should define the principles of future tariff policy, it should delegate to the President the power to change tariffs, fix certain quotas, and conclude and put into effect reciprocity agreements.

9. The President should apply these principles only after investigation and report by a reorganized Tariff Commission or other administrative body.

10. Future tariff reduction should take into consideration the extent to which import trade has been handicapped by depreciated currency.

11. The development of international trade depends upon the conclusion of an international currency agreement.

12. Exchange controls can be removed only when creditor countries resume purchase of goods from debtor countries. Once the United States commits itself to this position, it may be desirable to convert "frozen" credits into long-term loans.

13. While it is desirable to resume international lending under certain conditions, there is danger in the widespread extension of export credits before the Government has developed a sound commercial policy.

The Committee on Commercial Policy: Evans Clark, director, Twentieth Century Fund, New York; Charles A. Ewing, president, National Livestock Producers Association, Chicago; David Friday, president, Domestic and Foreign Investors Corporation, Washington; Harry A. Garfield, president, Williams College, Williamstown; William F. Gephart, vice president, First National Bank in St. Louis; Gardner L. Harding, New York; Henry J. Haskell, editor, Kansas City Star, Missouri; Philip F. La Follette, former Governor of Wisconsin; Peter Molyneaux, editor, Texas Weekly, Dallas; Malcolm Muir, president, McGrawHill Publishing Co., New York; Thomsa I. Parkinson, president, Equitable Life Assurance Society, New York; Ernest Minor Patterson, professor of economics, University of Pennsylvania, president, American Academy of Political and Social Science; G. B. Roorbach, professor of foreign trade, Graduate School of Business Administration, Harvard University; George Soule, editor, The New Republic, vice president, National Bureau of Economic Research, New York; James P. Warburg, vice chairman, The Manhattan Co., New York.

The CHAIRMAN. The stenographer please take note of the fact that the hour of adjournment is now 6:35 p.m. The hearing will be adjourned until 10 a.m. tomorrow.

(Thereupon the committee recessed until 10 a.m. Wednesday, Mar. 14, 1934.)