Xi’s Costly Obsession With Security
How a Quest for Control Threatens China’s Economic Growth
ON March 18 Secretary Morgenthau announced that after a certain date German goods entering the United States would be subject to additional or countervailing duties equal to 25 percent of their value. This action, popularly interpreted as revealing President Roosevelt's disapproval of German aggression in Central Europe, was explained officially as necessary to compensate for German export subsidies. News of this sort is not infrequent nowadays. The President is urged to use his latent tariff powers to dissuade Japan from closing the Open Door in China. Puerto Rican sugar mills protest Secretary Wallace's cut in their import quota allotments. American exporters, suffering under Argentina's discriminatory exchange control, demand relaxation of the sanitary embargo on Argentine meat. American nurserymen ponder the effects on their business of the proposed revision in the Plant Quarantine Act. State legislatures in New York and Massachusetts, not satisfied with federal marks-of-origin requirements, debate new ways to make sure that no consumer can purchase Japanese or German goods without knowing it. New state and federal "Buy American" laws restrict the expenditure of hundreds of millions of public money to the purchase of domestic goods.
Now, matters such as these were not the stuff of the American tariff problem as it has heretofore been known. From the Civil War until the Great Depression, "tariff discussion" meant either the consideration of the general issue of Protection vs. Free Trade, or else the question as to whether the rate on a particular commodity, such as sugar or raw wool, was too high or too low. These were matters for Congress, not for administrative officers, to decide.
I. THE VISIBLE AND THE INVISIBLE TARIFF
In a series of general tariff revisions, embodied in the acts of 1890, 1894, 1897, 1909, 1913, 1922 and 1930, Congress erected the towering structure of the visible tariff. Each successive tariff act was a major legislative event, attended by months of public discussion. Meanwhile, however, there was arising a second tariff structure, a comprehensive system of administrative controls over import trade. Attracting much less attention in the public press, rarely debated in Congress, and never the subject of discussion by women's clubs or businessmen's forums, the invisible tariff has spread its intricate network over an ever-increasing area of our foreign trade. Today, administrative measures are more comprehensive than the visible tariff, since they affect goods which are on the free list as well as those which are dutiable; they are more effective, since they make use of quotas and embargoes as well as tariff duties; they can be put into operation more promptly, since they do not need to wait upon discussion in legislative assembly. It was a customs lawyer who, appraising in 1922 the proliferation of administrative control of imports, shrewdly remarked, "Let me write the Administrative Act and I care not who fixes the rates of duty."
Extra-tariff controls over imports are objects of suspicion. In every customs regulation and every sanitary restriction on the importation of animals and plants, a measure of economic protection may possibly be concealed. Hence the origin of the phrases "indirect protection" and "administrative protection." But since legislatures are often responsible for such chicanery, the first of these expressions seems preferable. The United States, having acquired a reputation for ultra-high protection in its visible tariffs, has been accused of having used administrative controls unfairly to reënforce its protectionist system. Such accusations are not without foundation, as the following paragraphs will show. But the American record, when compared with that of other countries, is not bad. In all countries every additional measure of import control -- whether it refers to tea, milk, meat, alcoholic beverages, obscene literature, sealskins, grapes, narcissus bulbs or lottery tickets -- constitutes an added handicap to imports; however, if the new measure applies with equal force to domestic trade in the regulated articles, it does not afford economic protection. In the United States the administrative regulation of domestic trade is as comprehensive and exacting as that of imports.
Everywhere the world over since 1914, administrative measures have been attaining greater importance in the control of foreign trade. So great has been this change that rates of duty in certain foreign countries have ceased to have much significance when contrasted with the new invisible tariff barriers, the import quotas, exchange controls, clearing and compensation agreements and barter deals. From such measures, the commercial policy of the United States has until now been almost entirely free. The reason for this is to be found, not in any stronger attachment on our part to the principles of free trade, but in our continuing surplus of exports over imports. Our balance of payments has been active; the movement of gold has all been in our direction.
II. ORIGINS OF THE INVISIBLE TARIFF
Recently, increased administrative control over American imports has been urged as a weapon necessary to combat the aggressive trade policies of foreign countries, particularly the so-called totalitarian states. As we shall presently see, steps have already been taken in this direction. But the origins of our invisible tariff are of an entirely different character. They are to be found (1) in the growth of protectionism as a principle in our foreign trade policy, and (2) in the increasing regulation of interstate and intrastate commerce through the police powers of the federal and state governments.
Protectionism was firmly established in the United States by the Civil War. In the tariff legislation of the succeeding half-century, import duties were raised repeatedly. Also, in successive tariff revisions the classifications of dutiable goods were refined and narrowed so as to bring duties to bear more directly on specific types of imports. Both of these processes of change in the "visible tariff," entailing greater and more important activity on the part of customs officials, were responsible for the development of customs law. The increasing complexity of tariff schedules gave rise to innumerable disputes over the classification of dutiable merchandise; the higher duties put an increasing premium on smuggling, undervaluation and other evasions of the tariff law. As the tariff barriers rose higher and higher, greater attention had to be given to stopping the chinks through which illegal imports might seep.
To the layman, much of the customs formalities and customs procedure which has evolved in legislation, administrative regulations and court decisions appears absurdly technical. Some of the regulations, and more of the court decisions, appear to have been devised expressly in order to make things as difficult as possible for importers. Certain congressmen have given color to this view by taking the attitude that importing was a privilege, not a right, and that bringing foreign-made goods into this country was not a suitable occupation for patriotic citizens. But their attitude is exceptional; it would be absurd to contend that the purpose of our customs law, either statutory or administrative, is to obstruct imports. It is nevertheless true that, given the complex character of the import trade and the corresponding complexities of our visible tariff, any system of customs laws, no matter how neutral in intent and in administration, inevitably interposes added obstacles to the entry of foreign merchandise.
III. THROUGH THE CUSTOMS MAZE
In a little book called "Through the Customs Maze"[i] a well-known customs lawyer once outlined the process of importing. The metaphor is appropriate. The safest and quickest ways through the intricacies of customs procedure are known only to a highly specialized group of customs brokers and lawyers. The costs of their services constitute a part of the costs of importation. The premiums on bonds which are not infrequently demanded are another cost. Litigation must sometimes be resorted to for the protection of importers' rights. Competing domestic interests sometimes take advantage of privileges afforded them in the invisible tariff to harass importers. Importing has thus become an expensive, even a hazardous business.
When all this has been admitted, it is nevertheless true that American customs procedure is not nearly so burdensome from the point of view of importers as the corresponding procedure in many foreign countries. Nowhere is notice of impending changes in tariff duties or in customs regulations given more promptly than in the United States; nowhere are more liberal facilities afforded importers for appealing to the courts against abuse of authority by customs officers and against misinterpretation of customs laws. Importers complain of the occasional delays of months, sometimes of years, that ensue in the final liquidation of their entries, but they freely admit that such delays are not owing to inefficiency or an obstructive attitude on the part of customs officials. On the contrary, the desire of these officials to conduct their affairs with maximum efficiency coincides with the importers' desire to get his goods through the customs house as soon as possible. The greatest cause for delay is in appraising the value of dutiable goods. American statutory definitions of value are extraordinarily detailed and the results of appraisement are often unsatisfactory to importers. But they would probably be unanimous in preferring the American system, with all its defects, to the system of arbitrary official valuations used in certain other countries.
IV. DEFENSE AGAINST UNFAIR COMPETITION
Statutes and regulations designed to protect American business against unfair competition from abroad are essential components of our protective system. An important sector of our invisible tariff is made up of (1) laws requiring the identification of foreign goods by "marks of origin," (2) anti-dumping legislation, (3) laws applying countervailing duties to bounty-fed imports, (4) prohibitions on the importation of products made by convict labor and forced labor, (5) laws penalizing imports from countries that discriminate against American commerce, and (6) prohibitions and penalties against unfair competition in general. All of this formidable array of weapons of commercial warfare was designed solely for purposes of defense. They were intended, not to introduce new obstacles to "legitimate" importing, but to prevent or to neutralize unfair tactics on the part of foreign producers and exporters, or unfair advantages accruing to them through subsidies or bounties. Except for marks of origin, these weapons have been infrequently applied. Some have proved too clumsy for effective use, and all are double-edged, dangerous to the defender as well as the offender. Nevertheless, the presence of these laws on our statute books, and their occasional use, act as a deterrent to the acts and policies against which they are aimed. Also, they furnish a further opportunity for domestic interests to harass importers. Hundreds of complaints are lodged in Washington alleging dumping, infringement of patents, payment of bounties, and other types of unfair competition. Upon investigation the bulk of such charges prove unfounded. But meanwhile, the rumors that action has been initiated and the chance that penalties may be applied add to the hazards of the importing business.
The requirement that imported goods should bear marks indicating the country of origin aims to safeguard domestic producers against the danger that foreign goods may be palmed off as domestic. Just now the label "Made in England" or "Made in France" may help to sell imported goods, while "Made in Germany" or "Made in Japan" has quite the opposite effect. In general, marks-of-origin laws usually handicap imports even when not designed for that purpose. Marking adds to the cost of production. Our laws, which are unusually detailed, may not be understood by exporters; hence, importers find their goods held up on what appear absurd technicalities. By the 1938 revision of the customs law, some objectionable features of American marking provisions were eliminated. Also, the discretionary powers of the Secretary of the Treasury have been enlarged. Whether the new powers will be used to facilitate or to handicap importing will depend upon the attitude of this and succeeding administrations, and upon the interpretation given to the statute by the courts.
V. THE DEFENSE OF PATENTS AND COPYRIGHTS
American protectionism is not confined to helping domestic industrialists and farmers compete with foreigners; it extends its aid, in varying degree, to inventors, designers, authors, playwrights, scenario writers, musicians and artists of all kinds, and to the printers and publishers of their works. In other words, the invisible tariff applies to intangible property rights as well as to material wealth.
A general prohibition against unfair competition in the import trade has on several occasions been invoked to exclude foreign articles that infringe on American patents. American law, however, is unusually liberal in the facilities it accords to owners of foreign patents. They are subjected to no special taxes and are not required to "work their patents" in order to sustain their validity. Furthermore, foreign manufacturers licensed to use American patents may export the patented articles to the United States.
American artists and writers are the objects of more tender solicitude. Our copyright law aims to force publishers to manufacture in the United States all books that can find a substantial market here, to protect American authors and the publishers and printers of their books, and to promote the publication of American editions of books printed in the English language. With the opening of new and wider markets for American musical and literary genius in popular magazines, the radio and motion-pictures, the area to which copyright applies has been enormously extended. Protection against unfair foreign competition in these new fields is provided principally through the requirement of registration and through compliance with formalities prescribed by statute or by the regulations of the Copyright Office. Certain magazine publishers, motion-picture producers and broadcasting companies, on this account, oppose the adherence of the United States to the International Copyright Union, since such action would automatically give thousands of foreign artists full copyright protection in this country without the necessity for registration or compliance with other legal technicalities.
VI. THE BOGEYMAN OF FOREIGN TRADE
Dumping has long been the bogeyman of foreign trade. Manufacturers in every industrial country, fearing the unloading of foreign goods at cutthroat prices in their domestic markets, demand protective legislation. (The fact that they themselves practice dumping when they have a chance makes them no less active in trying to prevent foreigners from employing the same tactics.) In response to these complaints, legislatures in England, Canada and other countries, as well as in the United States, have enacted anti-dumping laws, most of which fail to accomplish their purpose. Ours, although very skillfully drawn, are no exception.
"Dumping" to the layman means any kind of underselling; to the economist, and usually to the legislator, dumping has nothing to do with the comparison of the prices at which foreign goods sell in our markets with the prices of comparable American goods. The comparison is rather between two sets of foreign prices, prices for sale abroad and prices of the same goods for sale in the United States. In other words, the phenomenon is price discrimination between national markets. Dumping in the technical sense occurs only when a foreigner sells more cheaply in the United States than in his own market.
The authors of the American anti-dumping law were fully aware that a carelessly drawn statute might be used as an engine of administrative protectionism. In fact, they were so preoccupied with avoiding this danger that they made their statute practically unworkable. The Treasury Department has received hundreds of complaints about dumping, but has very rarely authorized the application of anti-dumping duties. The trouble is that the law requires two sets of facts to be established: first, that foreigners have been selling goods here more cheaply than in their home market. That is very difficult to prove when, as the law requires, proper account is taken of quantities sold, terms of sale and other details which might invalidate comparisons. Secondly, the law requires, before a finding of dumping is issued, that the Treasury shall make sure that an American industry has been injured. These restrictions on administrative action have to be taken seriously. Occasionally when Treasury officials have been inclined to cut corners in their zeal to penalize dumping, they have been rebuked by the courts and their orders have been set aside. Since 1934, no new findings of dumping have been made. As long as the courts insist upon a strict interpretation of the statute, it is significant principally as a warning to would-be dumpers.
VII. THE DELEGATION OF TARIFF-MAKING POWERS
In the field of the tariff, as elsewhere, the remedy for legislative incompetence has been sought in the delegation of power to administrative boards. At first, these boards have only investigatory powers; later, they are given authority to exercise positive control over business operations. The inability, and unwillingness, of Congress to deal with the tariff problem honestly and effectively explains the transfer of tariff-making powers to the Executive in the "flexible provisions" of the tariff law and in the Trade Agreements Act. The United States Tariff Commission was originally, in 1916, merely a fact-finding body. It had no authority to recommend changes in rates of duty, and it was very careful not to do so. Rate-making powers were delegated in 1922 to the President, not to the Commission. To the latter was given the task of finding the tariff rates which would even up the difference between foreign and domestic costs. Upon receiving the Commission's findings, the President proclaimed changes in rates of duty.
This so-called "scientific solution" of the tariff problem proved a dud. It was not scientific, and it did not take the tariff out of politics. Instead it put so much politics into the Tariff Commission that it nearly wrecked an organization formerly distinguished for the high quality of its work. Unfortunate personal conflicts between members of the Commission added to the inherent difficulties of getting costs and comparing them. Few changes in duties were made, and those in the upward direction. The President still retains the power to adjust tariff rates to differences in costs of production, but this power is now entirely overshadowed by the new tariff bargaining powers granted in the Trade Agreements Act of 1934.
VIII. TARIFF BARGAINING, AN ADMINISTRATIVE JOB
The 21 trade agreements already concluded under this Act represent a decided reversal in the upward trend of American protectionism. For the first time since 1913, American tariff duties have been actually reduced. It is significant that Congress did not itself undertake to cut the high rates it had set up in the Hawley-Smoot Act; instead it turned the job over to the Executive. From the point of view of good government, the results have been revolutionary. For the first time in over a century, lobbying, logrolling and other obnoxious accompaniments of tariff revision have been relegated far to the background. The expert administrators who have the negotiations in charge are sufficiently insulated from contact with pressure groups to be able to consider primarily the public interest. Special interests are not neglected, but they are placed in their properly subordinate position. From the point of view of our foreign trade, the results are promising, though not revolutionary. After five years of tariff bargaining, dutiable commodities still constitute only 40 percent of our total imports; our trade balance still continues active; our farmers still complain of unsalable export surpluses. Upon examination, it appears that most of these conditions result from causes, such as political instability abroad, which cannot be immediately altered by changes in the American tariff. In the long run, they probably will be affected; but there is always the danger that Congress will not give Mr. Hull's program a long run. Protected interests, both agricultural and industrial, are bringing increasing pressure on congressmen to repeal the Act or to destroy its force by amendment. Recent proposals to increase import taxes on several fats and oils, under the guise of excise duties and in violation of the terms of four trade agreements, illustrate one of several types of sabotage that are being attempted. Producers for the domestic market oppose the program because it has done too much, or because it may do too much; exporters, on the other hand, are dissatisfied because it has done too little. The policy of bargaining and conciliation, they claim, is inadequate to meet the menace of totalitarian trade policies. They demand that stronger medicine -- barter deals, clearing agreements, exchange control and the like -- be administered to countries discriminating against American trade.
IX. QUANTITATIVE RESTRICTIONS ON IMPORTS
So far, the United States has rather successfully avoided the extreme measures of administrative protectionism which now characterize the tariff policies of other great trading nations. We do not practice exchange control, nor have we entered into clearing or payments agreements. But we should beware of a pharisaical attitude, for our skirts are not entirely clear. For example, notwithstanding our denunciations of quantitative restrictions on trade, we already have our quotas. Most of those introduced thus far have been fixed so high that they do not restrict imports. But the quotas on sugar do not fall into this harmless category. The restrictions on imports of Cuban and Philippine sugar are real restrictions; they have succeeded in accomplishing the usual results of quantitative restrictions, i.e. they have not only raised our domestic sugar prices but have insulated them from the fluctuations of world market prices. Moreover, under the powers granted the Secretary of Agriculture in the Soil Conservation Act, there is wide opportunity for the imposition of new quotas, not only on farm products, but on industrial goods as well. We have probably not seen the end of this system.
Thus far, the Administration has been very reluctant to authorize quotas on imports of manufactured goods. But what could not be accomplished by legislation, certain industrial interests have accomplished extra-legally. The recent agreement between the Cotton Textile Institute and an association of Japanese exporters, whereby the latter have limited their sales of piece goods in the American market for two years to 100,000,000 yards annually, is what is usually called a voluntary quota. One may perhaps be permitted to question the use of the adjective. If the Japanese exporters had not sensed in the background the threat of a legal quota, why should they have agreed to this restriction?
X. CONTROL OF DOMESTIC BUSINESS BRINGS CONTROL OF IMPORTS
The steady extension of government regulation over domestic business is generally recognized as a leading characteristic of our economic history in the past half-century. It is not so generally recognized that this development has been accompanied by a corresponding extension of administrative controls over imports. Pure food and drug legislation, the control of trade in alcoholic liquors and in narcotics are all illustrations of measures aimed primarily at the protection of American consumers of domestic products. But such protection, obviously, cannot be effective if the new American standards and regulations are not applied to imports.
Plant and animal quarantines are apt to be the touchiest spots in international trade relations. Every modern country feels the obligation to defend its livestock and its crops against the invasion from foreign countries of germs of contagious diseases, against parasites, insect pests and other kinds of crop enemies. But how far should such defense be carried? Perfect protection can be secured only by a 100 percent exclusion of all foreign plants and animals. Since this is obviously absurd, some reasonable compromise has to be worked out.
It is clear that many measures of biological protection inevitably provide economic protection as well. The more foreign cattle that are excluded, the larger the market for domestic cattle. Hence suspicion, often justified, attaches to all sanitary embargoes and quarantines. To the layman, the dictum of the biologists and entomologists that practically all of our most destructive animal diseases and parasites and crop enemies have been introduced from abroad sounds like peculiarly virulent xenophobia. But it is probably true. For, after all, practically all our domestic animals originally came from overseas, as did our more important bread grains, fodder crops, fruit trees and ornamental shrubs. But all that is ancient history now. Two centuries of experimentation have resulted in control measures which make the unwelcome visitors much less destructive. The balance of nature has been at least partially reëstablished; with due diligence we can keep the pests under control. But there is always present the danger of new invasions and, with the growing speed of transportation and frequency of service of steamers, trains and airplanes, the danger becomes each year more real. In the days of sailing vessels, an ocean voyage of six weeks rather thoroughly disposed of stowaway insects; their life cycle came to an end before the voyage was completed. Insects can now board an airplane in Guatemala or Venezuela and arrive safe and sound in Texas or Florida. It has been estimated that foreign countries harbor some 10,000 varieties of insects and plant parasites which have not yet made their appearance in the United States. In their native habitat, where they are in balance with their hosts and with other insects and parasites, they are not causing serious injury to plant life. But once introduced into the American environment, any one of them may so upset our balance as to prove a serious menace to our forests, our crops and our orchards. Considerations such as these justify our rigid control over the importation of foreign plants and animals by means of quarantine measures, and in some cases by embargoes.
XI. BIOLOGICAL VERSUS ECONOMIC PROTECTION
Under the guise of biological protection, however, it is very easy to introduce economic protection. European governments taught us this trick 30 or 40 years ago when they maintained embargoes on our pork products long after the danger of trichinosis had been eliminated. But it must be conceded that our cattle ranchers and our nurserymen have proved apt pupils. They have not hesitated to insist upon sanitary restrictions which on biological grounds were far from defensible. The outstanding example is the embargo on fresh meat imposed in the Tariff Act of 1930. Earlier legislation had given the Department of Agriculture full authority to impose restrictions on imports of meats and live animals from any country, or part of a country, found to be infected or exposed to infection with contagious cattle diseases. For some time the Department had exercised this discretionary authority without arousing serious complaints. But in 1930, Congress, yielding to pressure from American livestock interests and against the advice of the Secretary of Agriculture, made country-wide embargoes mandatory. As a result, his Department was forced to issue orders prohibiting imports of live cattle and meat from a very large part of the earth's surface, including important meat exporting countries such as Uruguay and Argentina.
Now it happened that, although large areas of Argentina are infected, Patagonia is free from the disease. Consequently, the exclusion of meat from that area could not be justified on biological grounds. Argentina, already embittered by our tariff increases of 1922 and 1930 on her major export products (beef, wool and mutton, hides and tallow, wheat, corn and flaxseed) protested, but without avail. The Roosevelt Administration, in line with its Good Neighbor policy, negotiated a Sanitary Convention which would have replaced our 1930 legislation with a policy defensible on biological grounds. But the same pressure groups which were responsible for the embargo have been successful in preventing ratification of the Convention. The repercussions on Argentine-American relations are unfortunate, to say the least. With British encouragement, Argentina has instituted an exchange control that discriminates against American exporters, and at the same time her attitude in Pan American affairs has remained uncoöperative.
This Argentine episode is valuable because it shows that many of the worst features of so-called administrative protectionism are not administrative at all, but legislative. The federal officials who administer the invisible tariff are in general not concerned with the economic effects of their policies. Occasionally one finds men who want to help domestic producers, or who want to help the importers; but they are exceptions. As a rule, the motive which animates the customs officers and the officials of the Department of Agriculture in dealing with imports, is to move the goods as rapidly as is consistent with the spirit and letter of the law, keeping in mind always that their decisions are subject to review and, perhaps, reversal by the courts. When Congress, however, has deliberately injected an element of economic protectionism into customs law or into sanitary legislation, the administrative officers have no choice. They must enforce the law, and bear the brunt of the criticism.
XII. THE PRESENT DANGER
The danger that the administrative control of imports will be abused lies at present, not in the economic, but in the political aspects of our foreign relations. The American people have been greatly disturbed by the aggressive policies of the so-called dictator states. They want to do something to show their disapproval without, however, getting involved in war. As a halfway measure, economic sanctions have been proposed, in the form of embargoes on trade with the offending nation. But since it would be difficult, probably impossible, to obtain economic sanctions by congressional action, why not secure the desired result by administrative action?
In the armory of the invisible tariff many powerful trade weapons stand ready at hand: anti-dumping duties, duties penalizing trade discrimination, and countervailing duties to offset export bounties. It is true that none of these weapons can be used legally except under conditions specified in statutes. Furthermore, these conditions concern the direct effect of specified policies on the part of foreigners, or of their governments, on American commerce and industry; they have nothing whatsoever to do with foreign disregard for international law, nor with military aggression. Ordinarily, these distinctions do not need emphasis, but under the influence of "crisis" hysteria, they may be forgotten or disregarded. Even highly-placed officials speak of fighting fire with fire. This is dangerous talk. A democracy, if it is to remain a democracy, cannot afford to imitate totalitarian methods. We cannot afford, in order to gain a tactical advantage in foreign policy, to encourage administrators to disregard not only the letter but even the spirit of the law.
The danger is real. Many thoughtful observers believe that economic sanctions are only a prelude to war. If this is true, then it is of the utmost importance that whatever new controls are imposed on our foreign trade for political purposes -- that is, as measures of foreign policy per se -- shall be imposed by Congress, not by administrative action.
[i] Benjamin Arthur Levett: "Through the Customs Maze: A Popular Exposition and Analysis of the United States Customs Tariff Administrative Laws, Including the 'Anti-Dumping' Law and the 'Flexible Provisions' of the Fordney Tariff." New York: Customs Maze Publishing Company, 1923.