How to Get a Breakthrough in Ukraine
The Case Against Incrementalism
NO one is content with the existing international economic arrangements. Trade is restricted by quotas and embargoes; national currencies are not freely convertible into those of other nations; the flow of foreign investment is exceedingly limited; and foreign aid by the United States is still measured in billions of dollars. So far as this country is concerned, the situation is summarized in the record of our balance of payments. In 1951 and 1952, the international current transactions of the United States with the rest of the world showed "favorable" balances estimated at $5,200,000,000 and $5,000,000,000 respectively. In other words, our exports of goods and services plus our income on foreign investments were much larger than our imports plus our payments on investments. This is the familiar "dollar gap" between what foreign countries sell to us and buy from us, and indicates their problem of finding dollars to pay for their purchases.
In 1947 the gap was $11,500,000,000. But though the comparative figures can be taken to show in broad terms how greatly the situation has improved, they do not really provide a full measure either of the economic progress which has been achieved or of the problem which remains. The figures include as "exports" military assistance estimated at $1,500,000,000 in 1951, and at $2,400,000,000 in 1952. On the other side, the "import" figures include certain extraordinary purchases resulting from military expenditures abroad. The net result of the military additions is to increase the apparent size of the gap.
And the figures are an inexact measure of the lack of economic balance for another reason. To a degree that cannot be estimated, nearly all countries have reduced their demand for American goods through quota restrictions on imports, and through controls of foreign exchange. In addition to restrictions on imports, many countries have placed limitations on the withdrawal of funds arising from earnings and amortization on American foreign investment. It would be largely true to say that our exports and receipts on investments are determined today by the availability of dollars and not by the demand abroad. The United States really establishes the size of the gap by its own policies.
Even though we recognize--as we must--that this is a world problem which can be solved only by a common effort by all trading countries, the fact remains that the attitude of the United States is a key factor. American assistance programs which have enabled foreign countries to pay for American exports in excess of their own dollar earnings have been essential for the economic recovery and the development of security in the free world. In 1951, grants and loans made by the United States Government amounted to $4,700,000,000, and in 1952 to $5,000,000,000. But neither restrictions nor grants are desirable ways of adjusting the balance. Large programs of assistance have always been regarded as a temporary device. Postwar economic planning was directed at achieving a world economy in which trade barriers would be greatly reduced and production would be expanded, so that an increasing number of countries would be able to improve their standard of living and pay their own way in international transactions. Whether this can be done depends on decisions we make no less than on actions taken abroad.
The inadequacy of dollar earnings for financing the gap between American exports and American imports is not a sudden development. Between the two world wars, a substantial part of American exports was financed by private American longterm investment, bank credits or the sale of gold to the United States. The use of trade restrictions spread rapidly during the thirties in an effort to conserve financial resources and maintain employment. However, World War II enlarged the scale of the problem. American productive capacity expanded greatly during the war, while the devastated countries of Europe found much of their productive capacity disorganized or destroyed. In addition, their foreign investments, whose earnings had previously financed a considerable part of their imports, were greatly reduced, and their new obligations to the dollar area rose rapidly. Sources of income like shipping, insurance and tourist trade decreased sharply. Furthermore, as recovery proceeded in the industrial countries, it became evident that the world's capacity to produce raw materials had not expanded as rapidly as its ability to utilize them, so that raw material prices rose disproportionately with the prices of manufactured goods. This shift in the "terms of trade" was particularly serious for those countries whose economies were based on importing raw materials and exporting manufactured products.
The efforts to expand production and trade as part of the Marshall Plan were progressing well when the imminent danger to the whole free world, foreshadowed by the failure of the Soviet Union to disarm after the war and brought to successive climaxes by the seizure of Czechoslovakia and the unconscionable attack on South Korea, introduced a new set of problems. To the burdens of the military actions in Korea, Malaya and Indo-China had to be added the rapid build-up of defensive strength everywhere. Although today the largest single element in the American assistance program is in the form of military equipment, our contribution covers only a fraction of the total cost of defense. The remainder must be raised by our allies out of their own resources. Not only has the strain on their governmental budgets increased greatly, with important effect on savings and investment, but the rise in prices of raw material and the diversion of productive capacity from export to armament have undercut their strenuous efforts to earn their own way.
The course of events and the magnitude of the problems were foreseen to only a limited degree by those who planned for the postwar world at Bretton Woods and elsewhere. UNRRA was established to meet the expected need for relief; however, the degree of economic destruction was greatly underestimated, and an additional series of programs was developed, culminating in the Marshall Plan, to provide the coöperative effort and the resources necessary for recovery. The International Bank for Reconstruction and Development had been expected to meet the requirements for economic development, but additional assistance was provided later through expanded United Nations programs, Point Four, the E.C.A. programs "in the area of China," and the broader Mutual Security Agency program. The necessity for a North Atlantic Treaty Organization and a supporting program of military assistance was certainly not foreseen.
Neither economic nor political programs have evolved smoothly. In the economic field crisis has followed crisis--the result, in part, of the absence of well-distributed reserves. In the early years after the war, it frequently happened that countries came to the bottom of the foreign exchange barrel and found themselves threatened with the necessity of cutting off such essential imports as food, oil or coal. The drastic steps taken in the crisis of 1947, when the British tried to meet the obligations of convertibility of the Anglo-American agreement, the crisis of 1949 when American imports fell off, and the crisis of 1951 when the reserves of the sterling area melted away, all are indications of the thin margins upon which these economies have been operating. It is amazing that the free world has moved ahead as well as it has. Not only have particular crises been surmounted, but substantial progress has been made in production, standards of living and capacity for defense. But the economic goal is still far distant, and we must seek more lasting solutions.
By far the largest items in our balance of payments are exports and imports of merchandise. The requirements for aid could obviously be reduced, or eliminated, if either our exports were cut or our imports increased. Recorded exports of merchandise have been about $15,000,000,000 a year for the last two years--about two and one half times the prewar quantity at about double the prices. Varying examples would be the wide-open buying in the United States by Brazilians when coffee prices skyrocketed and increased their dollar earnings, and the carefully-controlled expenditure of dollars by the United Kingdom. In general, the countries which are receiving economic aid are those where imports from the dollar area are most carefully rationed and where the restrictions on dollar purchases are greatest. A program to reduce our exports would have to be directed at the countries receiving aid, and the repercussions there would be severe.
A reduction in exports would, of course, affect the American economy. The export market is essential to many agricultural commodities. In 1951 we exported nearly one out of every two bushels of wheat harvested, one of every three bales of cotton picked, one out of every four pounds of tobacco produced, and one of every seven pounds of prunes dried. Our movies and many of our manufactured items have large foreign markets. To be sure, a policy of contraction is an economic possibility; but it would not only reduce economic activity at home and abroad, but would imperil many other objectives in our foreign policy.
But if the reduction of exports is an unhappy course of adjustment, what about increasing imports? It is true that 1952 probably represents the high-water mark in the quantity of goods imported. However, it is significant that the figure was not higher. During the prewar years there was a clear parallel between the quantity of our imports and the level of our industrial production. Yet in 1952, when industrial production was 120 percent above prewar, imports had risen only by about 50 percent. That the gap in the balance of payments was not worse is due to the fact that the average unit value of imports was nearly three times more than before the war.
Many causes have conjoined to hold down imports. The most obvious one, of course, is that American production facilities increased mightily while our foreign suppliers were suffering from direct and indirect war damage. In addition, the efforts of other countries to earn dollars are hampered by the hazards and red tape of our customs procedure, the continuance of high tariffs on many products, the use of import quotas or embargoes of our own to enforce domestic agricultural price support programs, the "Buy American" program enforced by the government on itself, and the restriction of certain imports like cheese and buttermilk powder under the Defense Production Act of 1950.
Since 1934, the central pillar in our trade policy has been the Reciprocal Trade Agreements Act. In 1930 the Smoot-Hawley Tariff Act had raised the tariff level to new heights. Since 1934, through a series of negotiations with other countries, tariff rates have been lowered from that high schedule by at least one-half on the average. It is only recently that the effects of these tariff reductions have begun to show themselves, since the operation of the Act has been confined to the depression period when the American market was not very attractive, the war years when goods could not move freely even if they were available, and the postwar years when foreign suppliers were still under tremendous handicaps. That these lower tariffs may be having an effect today is indicated by the number of applications filed during the last two years for the use of the "escape clause" whereby domestic producers can request increased tariff or quota protection if they believe that they are threatened with serious injury by competitive imports. The list includes such varied items as wood screws, spring clothespins, tobacco pipes, garlic, bicycles, bonito and tuna fish, dried figs, blue mold cheese, and certain types of china. Undoubtedly, as the economic recovery of other countries proceeds, and particularly as Germany and Japan increase their efforts to export, the list will rapidly grow larger and larger. Of course, if we adopt the practice of protecting domestic producers whenever there is an increase in imports, it is obvious that the possibility of expanding imports will be limited to those items which are not produced in this country, most of which are already on the free list or close to it.
The intention of the Congress in insisting upon the escape clause was definitely protectionist. Its supporters usually argued in terms of "I believe in liberal trade policies, but . . ." The existence of the escape clause, its actual application in several cases and threatened application in many others, have raised great difficulties for foreign countries which are trying to encourage their producers to earn dollars. Foreign producers have been given reason to fear that success in entering the American market will bring its own downfall. A few specific disbarments under the escape clause which undermine confidence in future conditions of trade can more than offset all the actions taken to lower trade barriers in the last 19 years.
Applications for escape-clause action concentrate attention on situations in specific industries, and give a myopic view of the problem. The fundamental issue in regard to imports is the question of conflicting interests within the United States. When a tariff is lowered, the domestic producer may suffer from foreign competition; and the exporter, the foreign investor, the taxpayer and the consumer may benefit. When the Dutch, in retaliation for our restriction against Edam and Gouda cheese, reduced their purchases of wheat flour in the United States, it was clear that the protection of the American producers of cheese was being achieved at the expense of the American wheat farmers, flour millers, and possibly even the taxpayer, since the domestic price-support program for wheat might be affected. If protection of industries which fear foreign competition (which conceivably might be good for some of them) appears to be a necessary part of public policy, it might be much better in the long run to provide assistance for them in shifting their resources to fields where efficient American production protects itself.
The Reciprocal Trade Agreements program is inadequate in another way. The notion of reciprocity has come to mean that any steps taken to increase imports by lowering tariffs should be accompanied by equivalent concessions in foreign markets. Some feel that the concessions won abroad have often been subverted by quota and currency restrictions. However, such restrictions are usually related to the availability of dollars, and if increased imports to the United States bring more dollars to the foreign country, restrictions are likely to be relaxed; in that case we would benefit by an increase in exports. But exporting is only one of our interests. We also wish freedom to service, amortize, and even repatriate our foreign investments. We wish to reduce the burden of foreign aid upon our national budget. It would therefore be more realistic if steps taken to increase our imports might be justified on a broader basis, and the concept of reciprocity not be limited to benefits for those in export trade.
In addition to tariff barriers, importers have long claimed that American customs procedures and the mysteries of tariff classification are substantial obstacles to trade. We make it exceedingly difficult for commodities to cross our boundaries. The hazards take the form of delay, unexpected costs and charges, and even refusal of entry. A few such instances may not only wipe out the profit of the individual involved, but raise frightening ghosts to other potential foreign suppliers. Any objective analysis of the world economic situation, and of our own position as a creditor nation, makes difficult the justification of policies which restrict imports. This is not to say that our import barriers are solely responsible for the lack of balance in our trade with other nations, but they are important causes. They are also important symbols of our attitude. A clear-cut statement of American policy followed by appropriate action should make possible a reduction in aid, and would be the kind of economic statesmanship which speaks far louder than words.
Capital goods--items to be used in increasing the ability to produce--are a substantial element in the flow of goods to other countries. Some are paid for by the foreign country's own earnings, some are financed by World Bank loans, some by United States Government grants and loans; and others are financed by private capital. The ambition for rapid economic development is a characteristic of underdeveloped countries. But they are subject to a vicious circle whereby their low levels of production and consumption make difficult very much in the way of savings or of tax collection, and therefore make it hard for them to obtain capital out of their own national income. In the past, such capital requirements, perhaps on a more limited and gradual scale, have been met in large part by foreign flotations of securities and by direct private investment. Today, many such countries are planning long-term development programs requiring large expenditures within the country and capital goods from abroad. Since in the present world the United States is the chief country to which they can look for capital, their progress often depends upon the amount of dollars available to them. Economic development is thus closely related to the pattern of world trade and payments. For example, if American capital could be used by underdeveloped countries to purchase machinery and equipment from Europe and Japan, these areas in turn could use the dollars thus earned to meet their payments with the United States. At the same time the expanded capacity to produce in the underdeveloped areas might increase their own ability to earn dollars. The most recent analysis by the O.E.E.C. puts particular stress on arrangements of this sort as a means of increasing the dollar earnings of Western Europe.
American policy has recognized that there are two things which can be exported to aid in economic development--technical knowledge and capital. The first is now made available by the United States Technical Assistance Administration and by various United Nations agencies. As to the second, the World Bank and the Export-Import Bank make loans to governments, and government instrumentalities, in order to help in the development of basic public services--roads, railroads, power, harbor facilities, etc. They usually restrict their credits to that part of the project which requires foreign exchange. To some extent, both of these banks have developed channels for assistance to private enterprise, though maintaining in general that the industrial sectors of developing economies must look to private sources for the equity part of their foreign capital needs.
The fact is that up to now American private capital has been willing to go abroad only to certain countries and for certain purposes. The foreign demand has had to compete with highly profitable uses for capital here in the United States; and, except for Middle Eastern oil, very little has gone outside of the Western Hemisphere. In 1952, the net flow abroad of U. S. private long-term and short-term capital was $860,000,000--a sum which may be compared with net income of $1,540,000,000 for 1952 on earlier foreign investments.
The business community itself seems to feel that the present situation offers little promise for any considerable flow of private capital and has suggested the need of some special stimulus such as tax exemption. But even this might not meet the problem. This is not a situation of the sort described by Marx in which the "capitalist" objective would be to take surplus goods off the American market to any spot, no matter where, so long as it was foreign. Our problem is how to accelerate economic development in various countries--those which involve the greatest risk as well as our immediate neighbors. But what would prevent the flow of specially-primed private capital from going almost entirely to the safest areas?
We have a real stake in encouraging the process of economic development. Added long-term investments in these areas will help finance the immediate demand for our goods, and much of it will expand the supply of raw materials so essential to all industrial countries. In addition, progress made toward an improved standard of living, and hope engendered, may help very importantly in maintaining political stability. Up to now, many of these areas have been slow in coming forward with an effective demand. There are two reasons for this. First, few of their projects have been sufficiently worked out to permit an assessment of the financial requirements and economic justification. Second, these countries have carried over their political nationalism into a sort of economic nationalism, which makes them shy away from private foreign capital. The first of these difficulties is dissolving as a result of educational work by the World Bank and Export-Import Bank, and by Point Four; and the second seems to be losing its force, at least in some areas. However, one suspects that if we really wish to see rapid progress made in economic development, we shall have to find ways and means for obtaining a much greater flow of capital into the sector hitherto reserved for private capital. One way or another, we must substantially increase our rate of foreign investment.
It would be unfortunate to imply that actions by the United States alone can establish a healthy, expanding world economy. To be sure, the extraordinary recovery of the last several years would have been impossible without our aid, and there are further steps which we can take to strengthen the productive capacity and dollar-earning ability of other countries. But real progress depends upon their internal policies as well as ours, and upon the degree to which larger trading areas are developed.
As a result of the depression, most industrialized countries made the maintenance of full employment the prime goal of economic policy. However, financial policies designed to conserve reserves in the face of an unfavorable balance of trade may require the tightening of credit and other deflationary measures which may lead at least temporarily to an increase in unemployment. Politically, it has often been much easier to meet such a situation by placing additional limitations on imports. But there are now many signs of willingness to use financial measures again in dealing with the problem of foreign payments. This is not to argue that full employment (with an allowance for some unemployment while people are changing jobs) is not an appropriate objective, but rather that to achieve it temporarily by inflation or by the loss of reserves is really not to achieve it at all.
While the lack of dollars is of major importance to virtually every country in the world, a great volume of the world's trade is among other countries, and the wider the trading area of each, the greater is its opportunity for expanding its trade and balancing its accounts. Already, there are two trading areas where nations settle their accounts on a multilateral basis--the sterling area and the region embraced by the European Payments Union. Obviously, the opportunity for trade widens when goods can be bought from one country, sold to another, and accounts balanced through some central clearing system.
It is at this point that the desirability of currency convertibility becomes so apparent. It would permit multilateral trade-- the maximum trade possible. However, three things need to be said about convertibility. First, it cannot be maintained unless the basic elements in the trade accounts are in approximate balance; a persistent debtor or a persistent creditor cannot maintain convertibility, unless, of course, there is a compensating flow of capital. Second, since there are bound to be swings of one sort or another, there must be adequate reserves to assure confidence that it will not be abandoned. Third, some way must be found to assure the appropriate coordination of national policies. At least in theory, the gold standard provided an automatic mechanism to correct disequilibrium, through the movement of gold from one country to another and consequent changes in relative price levels. Today, price levels are the result of national fiscal policies rather than automatic adjustments. Somehow, a force must be put to work which will bring about the results achieved by the gold standard. In other words, convertibility in today's world will require international monetary management of some sort or other, with national coöperation. It is a goal well worth striving for. When it is reached, most of the quantitative restrictions which so burden trade and payments will disappear and international accounts can be settled on a global basis. The world's resources will be distributed more according to economic requirements, with less arbitrary and fluctuating interference by governments. And the area within which competition will stimulate the search for efficiency and lower costs will be enlarged.
Some of the action suggested above can be taken unilaterally by the United States. However, any basic program for the expansion of world trade needs to be a coöperative effort in which the entire free world participates. At the present time, the procedure for developing a common approach to economic problems is exceedingly unsatisfactory. Primary responsibility for matters in the monetary field lies in the International Monetary Fund, which is seriously handicapped by charter provisions limiting its operations. Since the International Trade Organization was stillborn, responsibility in the trade field has fallen to GATT--to the contracting parties to the General Agreement on Tariffs and Trade. This organization was to perform a holding operation until the birth of the ITO, and is still holding. The United States membership rests upon GATT's activity in the field of trade agreements and it has never received Congressional approval.
In the case of both organizations, the duties and obligations of members, and of the organizations, are spelled out in considerable detail. The argument for such detailed codes was that it would be easy to translate precise duties and obligations into precise action when the concrete problems appeared. However, the actual problems seldom turn out to be quite what was expected, and what were regarded as precise words suddenly require further interpretation. The result is that a sort of legal controversy develops around the meaning of the original obligations.
It is tremendously important that there be organizations responsible for dealing with problems rather than for administering an elaborate charter. Thus the O.E.E.C. and the International Materials Conference were effective because they were responsible yet escaped being legalistic. With appropriate American leadership, both the International Monetary Fund and GATT can be much more effective as centers for discussing the requirements for a healthy world economy.
Finally, the uncertain status of GATT must be clarified. It is unfortunate that, while international bodies with Congressional blessing exist for everything from stamps to ships, there is no ratified international body for trade problems. GATT should be given Congressional sanction as it is, or should be revised (in which case other countries will propose their pet changes), or should be supplanted by some new organization. So many countries are involved in these economic problems that they cannot be solved by bilateral diplomatic exchanges. Such discussions are of course essential, but the consequences of decisions are widespread, and all countries involved are entitled to participate in the decision.
It is time for a change. We need a more vigorous program, sponsored by the Administration and accepted by Congress, looking toward the ultimate balancing of our trade accounts. And we must strengthen our support for economic development in foreign lands. The matter is urgent, for trade restrictions, once imposed, tend to be self-perpetuating. Many industries in foreign countries have been sheltered from foreign competition for more than a decade. In this country, the protections of war years permitted many enterprises to establish themselves in markets previously occupied by foreign suppliers. In a number of cases, these war-babies have been the most determined seekers for more protection through the escape clause; they sought it even before imports had reached their prewar levels. Protected trade builds up vested interests, and the longer restrictionism continues, the harder it will be to break down.
Secondly, continued foreign aid is also undesirable, at least in the form of balance-of-payments grants. Aid should be constructive, providing an incentive and a promise of betterment, rather than merely an avenue of escape. Free transfers do not provide a healthy basis for continuing international relationships. Nor is aid popular with the recipients, though it may be necessary. When the United Kingdom announced in 1950 that it was ready to stand on its own feet, as did the Dutch in 1953 before the calamitous floods, one could sense not merely the pride but the relief that came from their ability to assert their independence.
Thirdly, the economic underpinning must be strengthened in order to avoid the disturbing and upsetting effect of repeated crises. There has been a tremendous shift in the economic positions of various countries and a consequent instability in their economic policies. One year, the United Kingdom announced that it needed no more aid. The year after, it was taking extraordinary steps to check the disappearance of the sterling-area reserves. In about two years' time, both Australia and Brazil have moved from easy to straightened circumstances. Something is wrong in a world trading system in which such instability exists.
Finally, it must be noted that a strong and expanding economic system is important not merely for itself but because it is an essential element in total foreign policy. Our international objectives are by no means all of an economic nature; in fact, our greatest expenditures since 1914 have been made in fighting the thrust of aggression. But although our general objectives are stated in terms of increased capacity for defense, political stability, freedom and international goodwill, the pursuit of these non-economic ends usually leads fairly directly to the economic field. Their achievement depends in large part on whether the United States and other nations utilize and expand their economic capacities.
The effectiveness of our economic policy depends upon the consistency with which we apply it in each specific situation. We shall gain nothing--indeed, we shall do much harm--if we issue statements of high objectives and professions of international responsibility, and then in the process of carrying them out permit them to be undercut here, there and everywhere by partisan groups and narrow economic interests. None of the economic problems is an isolated one; all must be seen in full perspective. We must present the world with such a consistent performance in the economic field, day after day and year after year, that the economic foundation of the free world will have solid strength. All other elements in our foreign policy will gain strength thereby.