The ignoring of the provision that "existing internal taxes of this kind shall be subject to negotiation for their reduction or elimination" furnishes additional proof that the United States is under no obligation whatsoever to make any of the changes proposed in section 22 of H. R. 5505. In other words, if the authors of H. R. 5505 were seeking to perform an obligation of the United States under GATT, it would appear that they would do so in toto by making the processing taxes when converted to import taxes subject to reduction, rather than to specifically prohibit such reduction.

2. The proposal to convert the taxes on hempseed, perilla seed, kapok seed, rapeseed, and sesame seed into import taxes as contained in section 22 is redundant, as these taxes are already collected at the port of entry and have the status of import taxes

H. R. 5505 also proposes to convert the taxes on hempseed, perilla seed, kapok seed, rapeseed, and sesame seed into import taxes. The taxes on these oilseeds likewise originated in the Revenue Act of 1934. They are, however, already being collected at the port of entry at the time of importation by the collectors of customs. They are already regarded as import taxes, and not as internal taxes, as evidenced by the fact that the statutory rates of tax as given on page 39, lines 24 and 25, and line 1 of page 40 of H. R. 5505, have been reduced under the provisions of section 350 of the Tariff Act of 1930, as amended. We give herewith the statutory rates of duty on these five oilseeds, with the existing rates of import tax.

1 Lowered by GATT to 0.69 cent per pound, but restored to statutory rate when China withdrew from GATT.

We point out that none of the above reductions in amount of tax could have been made if the taxes borne by the five oilseeds had the status of internal taxes as internal taxes have been ruled by the Department of State to be immune from negotiation for reduction. The portion of section 22 which relates to the taxes on the five oilseeds above listed may, therefore, be considered as redundant by the Senate Finance Committee in that they propose to do something which was accomplished at the time of the original enactment of these five taxes. The Finance Committee should, therefore, of necessity eliminate these provisions of section 22. If the Finance Committee does this and accepts our initial recommendation that it eliminate the portions of section 22 dealing with the changing of processing taxes into import duties, this will dispose of section 22 in its entirety.

3. The change-over from processing taxes to import taxes would require copra and palm-kernel crushers and coconut oil processors to obtain $18.6 million additional working capital

The collections from the processing tax on coconut oil in the fiscal year ending June 30, 1951, totaled $18,572,838.15. The conversion of the processing tax on coconut oil into an import tax would oblige the crushers of copra, the refiners of coconut oil and the manufacturers of fatty acids and higher alcohols from crude coconut oil to pay out this amount of money at the time of importation (granted that consumption would be as large in the current fiscal year). The present system whereby the processing tax is collected on the first domestic processing does not require the payment of the processing tax until some 3 or 4 months after the entry of the coconut oil, and in the case of copra crushers who produce crude coconut oil solely the tax is not paid by them at any time.

The collection of the processing tax on the first domestic processing results in the factory consumer having to pay the processing tax. This means responsibility for the payment of the tax to the Treasury is diffused over a wide area: i. e., the many factory consumers pay the tax, whereas the collection of the tax at the port of entry would throw the burden upon the baker's dozen or so of copra crushers, coconut-oil refiners, and distillers of fatty acids from crude coco

nut oil. Conversion of the processing tax to an import tax would, therefore, make it mandatory for this handful of processors to procure additional working capital in the amount of $18.6 million over and above their current requirements. The procuring of additional working capital is exceedingly difficult insofar as the procuring of such capital from the accumulation of savings by corporate entities is concerned. It can only be obtained by bank loans, which would add materially to operating expenses, or by the issuance of bonds or stock issues, the salability of which is doubtful as profit in the case of crushers of copra in practically nonexistent due to the severe competition between European, Philippine, and United States buyers for the Philippine copra supply. (It should be understood that the purchases of copra by United States buyers are confined to the Philippines by virtue of the 2 cents per pound differential in the processing tax in favor of the Philippines a preference which is continued by the Philippine Trade Act of 1946 (Public Law 371, 79th Cong.) until July 4, 1974.) This condition of no profit has prevailed for so long a period of time that some of the crushers of copra are very near the end of their rope. The necessity of raising additional working capital could very well mean the forcing out of business of some of these firms. Parenthetically, the crushing of palm-kernels in the United States is carried on by the crushers of copra. A more correct designation for this industry would be the copra and palm-kernel crushing industry.

In prewar days approximately 90 percent of Philippine copra and coconut oil was shipped to the United States; 71 percent was shipped to the United States in 1948; 69.5 percent in 1949; 67.3 percent in 1950; and 50.2 percent for 1951.

Despite the Munitions Board stockpiling program during 1951, only 50.2 percent of the Philippine copra and coconut-oil exports were shipped to the United States in that period. Since the Munitions Board has expended practically all of its funds which it had available for the purchase of coconut oil for the current fiscal year, it means that the calendar year 1952 will see an even further decrease in the proportion of the Philippine copra and coconut-oil supply which the United States receives. This is a bleak prospect for the copra-crushing mills, as they have largely been dependent upon the stockpiling program to keep them in operation over a period of many months.

4. Conversion of the processing tax on coconut oil to an import tax would have serious repercussions on commerce between the United States and the Philippines

The Philippines in the year 1950 stood twelfth in importance in the volume of exports from the United States and in the ranking among the suppliers of products imported by the United States they stood tenth. In the calendar year 1951, the United States exported $350,000,000 worth of merchandise to the Philippines (35 percent more than in 1950). Of this sum, $92,500,000 worth were agricultural products. The Philippines can buy from the United States only to the extent that they are able to sell their products to this country. The presen diversion of the flow of Philippine copra from the United States to Europe means that the Philippines will buy proportionately less from the United States.

To transport a cargo of copra from the Philippine Islands to the west coast of the United States where most of the copra crushing mills are located requires 3 weeks. To transport copra to New Orleans from the Philippine Islands and up the Mississippi River to reach interior copra-crushing mills requires 7 weeks. To transport copra and coconut oil from the Philippine Islands to the copracrushing mills on the Atlantic seaboard requires 5 to 6 weeks. A month or more may elapse before a steamer is booked by the Philippine Islands dealer. The elapsed time between the date of purchase in the islands and delivery in the United States may, therefore, range from 2 to 3 months.

The long period of time required to lay Philippine copra and coconut oil down in the United States makes it desirable that crushers and refiners carry stocks on hand against which no commitments have been made. To not do this would seriously diminish the volume of business done. Somewhat the same factors exist in the crushing of palm kernels which come from the west coast of Africa and from Indonesia.

Should the processing taxes on coconut and palm-kernel oils be converted to import taxes crushers of copra and palm-kernels and refiners of coconut oil will only rarely be willing to make the heavy investment in the import taxes to the extent required in the carrying of adequate unsold stocks. This will simultaneously make their business even less profitable than at present while reducing the flow of commerce between the United States and the Philippines.

5. The imposition of an import tax in lieu of the processing tax would create inequities between copra from different producing areas and between individual crushers and would result in complicating customs procedure

Section 22 does not designate the amount of duty which shall be levied on copra and palm kernels but leaves the determination to the United States Tariff Commission. In the case of copra that agency would find that the oil content of copra varies in various producing regions. Some is sun dried. Some is kiln dried. The latter, if dried by native methods, is apt to be high in moisture. Hence, the Tariff Commission in endeavoring to ascertain the duty on copra which would be equivalent to the 3-cent per pound processing tax on coconut oil would be obliged to take into consideration the fact that speaking in general terms the oil content of copra varies with its moisture content. Further, the Tariff Commission would find that copra produced in an area which grows small coconuts will yield more oil than copra produced in an area where large coconuts are grown. For these reasons the application of a flat rate of import tax on copra would be apt to work so great an injustice that it had best not be attempted in the first place. On the other hand, the basing of the amount of tax on the actual oil content would be so difficult of administration that it is a foregone conclusion that the result would not be customs simplification.

The collection of the processing tax on coconut and palm-kernel oils on the first domestic processing works no discrimination among crushers. A tax on copra would, however, because those crushers who are equipped with solvent extraction facilities would obtain considerably more oil per ton of copra or palmkernels than those who are dependent upon expellers solely. Thus, the amount of tax paid per pound of oil produced would be proportionately less for mills using solvent extraction. No such inequity arises with the processing tax in that a uniform tax of 3 cents per pound must be paid upon each and every pound of coconut and palm-kernel oil processed in the United States.

6. The industries affected by section 22 already have an unemployment problem which would be immediately aggravated if section 22 remains in H. R. 5505 on final passage

A very large proportion of the copra-crushing industry on the east and west coasts of the United States is shut down at present. Those crushing mills which can operate do so only on an irregular basis. This means that they have been obliged to lay off large numbers of their employees. Much of this unemployment is due to the loss of 30 percent of the chief market for coconut oil which is in the soap industry due to the competition of synthetic detergents with soap.

Refiners of coconut oil who in pre-World War II days supplied 75 percent of the ingredients of oleomargarine now are unable to market a single pound of their product for that use. This is due to the fact that during World War II when oleomargarine manufacturers were denied the use of coconut oil, because of the need to preserve available supplies for military use, they found that a better product could be made from cottonseed and soybean oils.

If section 22 remains in H. R. 5505 upon final passage, because of the further difficulties with which it will confront copra crushers and coconut oil refiners in operating at a profit, it will make it even more difficult to provide employment for their workmen. This furnishes an additional reason for eliminating section 22 from the bill now before the Finance Committee.

7. We doubt that the authors of H. R. 5505 realized the adverse effects which section 22 would have on the copra and palm-kernel crushing industries and are of the opinion that the authors of the bill will agree to the elimination of section 22 when same are pointed out to them

The authors of section 22 while undoubtedly aware that the United States is under no obligation under any international covenant to change existing processing taxes into import duties are assuredly unaware of the injury which would result to the copra-crushing industry. These phases have been dealt with adequately in the preceding portion of this brief.

One phase which has not been touched upon is the necessity of a strong copracrushing industry in the United States to the national defense. The Munitions Board carries a 5-year supply of coconut oil which it stocks for military needs such as the manufacture of napalm bombs, rubber substitutes, insecticides and germicides, synthetic resins, etc. This is an additional reason for the elimination of section 22.

A further aspect which should be taken into consideration is that copra and palm kernels are on the free list in the Tariff Act of 1930. There is, in fact, no record of an import duty having been levied on these oil-bearing ma

terials in any tariff act-including that of 1789, which was the first tariff act enacted by the Congress. Section 22 would require the imposition of import taxes on copra and palm kernels. Both are bound on the free list in GATT. While not contributing to customs simplification, these import taxes would complicate our diplomatic relations. Not only Great Britain, at whose request copra and palm kernels were bound on the free list, but all other suppliers of copra and palm kernels to the United States will undoubtedly object to arbitrary removal by the United States of copra and palm kernels from the free list of GATT. Further, the attempt to impose a customs duty on copra which would be administered on an equitable basis would present difficulties which would complicate rather than simplify customs procedure.

Section 22 of H. R. 5505 also proposes to change the processing tax on palm oil to an import tax. Since this brief deals with the problems of the copra and palm kernel crushing industry, we will not enter into a detailed discussion of palm oil and will be content to point out that palm oil is tax-exempt as respects its chief usage; i. e., in the manufacture of tin plate. Its other fields of usage have been largely interdicted by the 3-cent per pound processing tax. Belgium, the Republic of Indonesia, and Great Britain, who are the chief suppliers of palm oil, would like to regain some of this business-particularly that which they had in the textile industry. Their chances of regaining any of it will be lessened by the change-over from a processing tax to an import duty for reasons similar to those applying in the case of copra, palm kernels, coconut, and palm-kernel oils.

We have heard of no demand emanating from the countries of origin of copra, coconut oil, palm kernels, and palm oil for a change-over from processing taxes to import taxes. Two of these countries, i. e., Indonesia and Belgium, which speaks for the Belgian Congo, in fact, have submitted protests in opposition to the proposal through the intermediary of the State Department. Great Britain has also protested section 22.

In the testimony delivered on H. R. 1535 (forerunner of H. R. 5505) before the Ways and Means Committee not one witness testified in favor of the changes proposed in section 22 of the bill now before the Finance Committee. On the contrary, the testimony was unanimously against the changes proposed. In view of the definite lack of demand for the changes proposed in section 22 and in the absence of any obligation on the part of the Government of the United States to make the proposed changes, we see no reason why section 22 should not be eliminated from H. R. 5505 and most earnestly petition the Senate Finance Committee to do so.

The CHAIRMAN. Mr. A. E. Thorpe?

(No response.)

The CHAIRMAN. Is Mr. Rocca here?

Mr GORDON. Mr. Rocca is not here. I spoke for him.

The CHAIRMAN. And Mr. Thorpe is not here.

I believe that finishes the testimony, then, of the witnesses.

The hearings will be adjourned until we have an executive session of the full committee.

(The following information was supplied for the record :)

BRIEF SUBMITTED BY EDWIN WILKINSON, EXECUTIVE VICE PRESIDENT, NATIONAL ASSOCIATION OF WOOL MANUFACTURERS, CONCERNING H. R. 5505 (THE CUSTOMS SIMPLIFICATION ACT)

Section 303 of the Tariff Act of 1930 provides:

"Whenever any country * * *shall pay or bestow, directly or indirectly, any bounty or grant upon the manufacture or production or export of any article or merchandise manufactured or produced in such country * * * and such article or merchandise is dutiable under the provisions of this Act, then upon the importation of any such article or merchandise into the United States * there shall be levied and paid, in all such cases, in addition to the duties otherwise imposed by this Act, an additional duty equal to the net amount of such bounty or grant. however the same be paid or bestowed * * *"

That is the law. That is the language. It is clear. It is specific. understandable today as it was in 1930.

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It is as

Mr. Frank A. Southard, Jr., special assistant to the Secretary of the Treasury, who has appeared before this committee, seems to suffer the delusion that these

words have different meaning in this modern world as he refers to it. We do not agree. It is obvious to us, and we are sure it must be to you, that when those words were written in section 303, Congress was not thinking solely in terms of "cash bounties" nor, indeed, of any single set of circumstances. The words "directly or indirectly" bear witness on this point as do "however the same be paid or bestowed."

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In his apologia, representing the Secretary of the Treasury, Mr. Southard says you will appreciate that the problem is greatly complicated for us by the growth in recent years of complex systems of multiple export or buying exchange rates," and further along he catalogs alleged underlying reasons for the maintenance of multiple rates of exchange:

*

*

66* *

(a) * countries often find it much easier to collect revenue through their central banks and exchange authorities

(b) "(They) can also be an effective means of controlling the inflationary effects of large earnings in a few export industries at a time when other export industries are not booming.”

Mr. Southard does not contend that multiple rates of exchange may not be used in order to bestow bounties or grants. In fact he admits that Treasury "has always felt that it is possible." However, he contends that "the extreme complexity of the motives and economic results" makes it "extremely difficult * to determine that a system of multiple rates of exchange bestows a bounty or grant." We believe the "motives" for multiple exchange rates have no place in this discussion. There is not one word in section 303 dealing with motives for bounties or grants, however achieved. Important are the economical results.

In November of 1950 we advised the Treasury Department of the economic result of the fact that Argentina and Uruguay maintained multiple rates of exchange for wool and wool top. In the Argentine the rate for wool was 5 pesos to the United States dollar and for wool top it was 71⁄2 pesos, a subsidy on the manufactured top in the magnitude of 50 percent of the value of the raw material of which the top is manufactured. There is nothing complicated about this.

Mr. Wellman, one of our directors and the president of Nichols & Co., top manufacturers, has recorded the economic results here in the United States. From nothing in 1947, top imports from Argentina and Uruguay alone have reached a volume of 7,564,000 pounds in 1951. Wool top from the Argentine has been offered for $1.41 per pound on the same day that suitable wool from the same source, to make a like grade of top, was quoted at $1.42 per pound clean basis. And it costs about 48 cents a pound to convert that wool to top. There is nothing complex about this, yet Treasury says this difference in exchange rates does not constitute a grant or bounty in the "usual sense of the term" (letter: Commissioner of Customs, December 14, 1950). Nor was this an offhand opinion, for this view was reaffirmed one month and a half later.

Now Treasury, which apparently can't recognize a bounty or grant when it sees one, stands before you as sponsor, and asks your support of a provision that would make implementation of section 303 dependent upon a finding by the Secretary that an American industry is injured or retarded in consequence of the bestowal of a bounty or grant. Based on the futile experience we have had in attempting to persuade the Treasury Department to administer the existing law as we believe it is written, we attest that in our judgment such an amendment would be most hazardous and against the interests of our industry and its workers and, in the final analysis, the national welfare.

There is much more at stake in the principle involved here than the relative volume of top produced in this country and that imported from abroad. Mr. Southard has said before this committee: * * the American processor

has an active interest in obtaining his imports at the lowest cost possible." How wrong he is if he infers that they favor continuation of the flaunting of our national policy by foreign interests by such sophisticated subsidy schemes. Mr. Arthur O. Wellman, appearing before this committee on April 28, 1952, testified that he was probably one of the largest importers of these subsidized tops and that it had attractive profit possibilities. Yet he pleaded for you to take measures that would put an end to the practice in the interest of the wool industry and its workers in the United States. We, too, make the same plea and our organization represents the processors of wool in all stages up to yarn piece goods and blankets. Our mutual desire to stop this circumvention of our tariff policies springs from the belief that a strong, vigorous, and prosperous wool-textile industry within our own borders is in the national interest.