Historical Development of U. S. Foreign Following World War II, U.S. foreign trade, which has never been a major proportion of our economic operations in recent times, (it was 41/2 percent of Gross National Product in 1953 and 1960) was of critical importance for a number of countries. Developed countries were concerned in connection with reconstruction and economic recovery. Underdeveloped countries were concerned with development and economic expansion. U.S. trade policy was a major concern to many foreign countries. This situation is generally no longer the case. From this point of view it then is possible to say that the U.S. is in a better position than it ever has been to set its trade policy with a single-minded concern for its own best interests. At the same time, of course, the factors that have led to this situation also mean that foreign countries are relatively more free than they have ever been in developing their own response to whatever policy may be developed by the U.S. Following World War II, the economic condition of the U.S. was so superior to that of the rest of the World that there was a general relaxation of all types of restrictions upon imports. General continuance of economic operations approaching full employment even encouraged considerable expansion of American foreign operations. As these various policies have run their course, and with their help, many of the western and industrialized countries of the world not only have achieved recovery, but have attained new heights of economic development. Partícularly, the more socialized countries of both western and eastern Europe have secured economic stability and a considerable measure of well-being. It is in this context that it is increasingly possible to say that U.S. decisions concerning foreign trade, although having an impact upon some countries and forcing some adjustment, are likely to be less and less critical to world prosperity as time goes on. Close neighbors, like Canada, will be some notable exceptions. On the other hand, some, like Cuba, have escaped our influence in trade by other means. Special consideration can be continued for less developed countries in the form of direct aid programs. Therefore, we are relatively free to develop what policy we wish. And, we may do this also in the full knowledge that, one way or the other, we are not likely to do enormous harm to ourselves when the sum and substance of either our total exports or imports does not exceed five to six percent of our total Gross National Product. Since this is the case, there seems to be little point to continuing the practice of manipulating our foreign trade as an adjunct of full employment fiscal policy. There is relatively little to be gained, one way or the other. However, in a trading world otherwise, our imports and exports are increasingly tied together. Other countries pay for their imports from us (our exports) with their exports to us (our imports). And, if the means of payment is reduced they trade with someone else. This is the real meaning of the recent efforts of our trade policy of the last eight months. Moreover, it should be noted that even our relatively small level of imports has a beneficial competitive effect in the domestic economy. Four price levels in a number of monopolistic industries would surely be higher without the competitive threat provided by imports. In the course of Phase I of controls in the domestic economy, we imposed an across the board import surcharge. We devalued the dollar to increase our exports. And, we concluded some bilateral agreements for reduction of some imports from some countries (some of which, Italy for example, acquiesced with remarkable alacrity). The first indications of the modern results of this policy now are beginning to trickle in. We are told that the balance of payments for the first quarter of 1972 is the worst that it has been in six years; 10 new countries have come into the Common Market, rather than the previously projected six; and it now is estimated this is very likely to cost us $1 billion annually in exports. As previously indicated, this probably will not break us, but it does suggest we ought to begin to look at our trade policy rather carefully in terms of just what it is that we want to do with it. If we continue to reduce imports, or pass the Burke-Hartke Bill, we can expect a continued decline in exports, too. The Burke-Hartke Bill Our most apparent problem appears to be that some imports are keeping some of our people out of work. On the other hand, a decline in exports also puts people out of work. The quota on Italian shoes probably kept some shoe workers at work in the U.S. We don't know what Italy might have bought that they are not now buying-from us. But, whatever it was, we lost an export and other jobs. In addition, it is suggested that American firms' investment of capital overseas (imports of IOU's, bonds, stocks, etc.) is providing income to these firms (which provides us with claims on foreigners just like exports do) without those firms' having to employ American workers. No one seems to want to understand that if GM could not assemble parts in Japan with "cheap labor" GM might not have as big a domestic operation at home and not employ as many workers here rather than more, because the increase in GM's costs would merely raise prices. This, itself, would induce further imports. To alleviate these problems, the Burke-Hartke Bill would establish quotas for all imports, and tax foreign investment more heavily. This may be the first time a trade bill has attempted to deal with the problem of corporate America's investment in foreign countries, with the objective of reducing that investment as a means of supporting employment at home. Such an effort is all the more tragic because this type of attempt to control it is based upon a false premise. The premise, very simply, is that, if American corporations could not invest some given. amount elsewhere, they would invest that same amount here. and employ the necessary resources and labor which would otherwise be unemployed. Alas, the capital is traveling abroad in the first place because the return is better. It is receiving an income-which improves our balance of payments-and, if we cut off the export of capital, nothing currently is happening to our economy which would induce its investment here. Furthermore, if U.S. firms did not so invest abroad, they generally would lose part of their export markets to foreign firms. Quotas will reduce imports and we can all pay higher prices for shoes and keep a few more shoe workers earning their close to minimum wages. (After all, it is true, a minimum wage is better than none!) But, this offers no protection to workers in undetermined industries where the market has declined because, for some inexplicable reason, exports have been reduced. The question can be said to be: should we accept a system that shifts a portion of unemployment from one group of industries to another? And if so, can we simply ignore the effects upon export industries just because the problem appears to be less identifiable? Our real problem at the present time is unemployment throughout the economy. Shutting off imports will hardly solve the problem alone, especially if exports suffer an equal decline due to predictable retaliation from abroad. With exports increasingly tied to imports, it would seem to make more sense for us to deal with both in line with a coherent policy directing itself to all of the issues involved in our international trade. A system of flexible tariffs appears to be a better answer for import and export problems than a rigid set of percentage quotas on imports. These considerations suggest some modification of the hard Burke-Hartke line which could lead to a more beneficial trade policy. Taxation of Foreign Investment Much of the current tax policy on foreign investment has been in the direction of encouraging and subsidizing such investment. We no longer have need for this policy except in the cases of some truly under-developed countries, where the problem can be more advantageously handled through some kind of direct aid. Therefore, there is no particular reason we cannot at least consolidate our tax policies and give equal tax treatment to both foreign and domestic investment. It appears that some of the substantive tax proposals in the Bill provide a desirable method by which multi-national firms can be significantly controlled and the flow of U.S. capital and technology can be significantly decreased. Support can be given to the repeal of the tax credit against U.S. taxes which currently is given to U.S. firms for payment of foreign taxes. The present reasoning whereby tax credit is not allowed on U.S. taxes for payment of individual state taxes while such tax credit is allowed for payment of foreign income taxes, is subject to question. The obvious intent of such reasoning is to encourage U.S. investment abroad and to promote the exporting of U.S. technology. While such an intent can be supported in underdeveloped countries in connection with our foreign aid program it really serves no purpose in more industrialized nations. Such foreign tax credits for multi-national firms appear to us to be blatantly inconsistent with the desirable objectives of equal tax treatment and maintenance of high employment levels domestically. The proposed repeal of this tax credit will be an instrument in reducing both U.S. foreign investment and the transfer of technology that is presently moving to highly industrialized nations. For firms which currently are overseas with the expectation of these credits, a grace period should be allowed, within which the full, impact of the tax would be returned slowly. Support can also be given the intent of the Burke-Hartke |