The American Tariff and World Trade


ONE of the legacies which the war is leaving to the world is the task of rebuilding trade between countries. The war has increased the productive capacity of India, Mexico, and some countries of South America, Africa, and the Near East, and has substantially reduced the productive capacity of many countries in Europe. It has caused or hastened important duplications of producing capacity. The synthetic-rubber industry, for example, will permanently deprive the East Indies of much of their market; nylon will deprive Japan of most of its market for silk, its largest export; improvements in rayon, stimulated by lack of silk, will reduce the market of American cotton growers; the large expansion of soybean production in the United States, accelerated by the war, will furnish new competition for the tropical oils industry.

Germany, if the unfortunate Potsdam “settlement” is allowed to stand, will be reduced as a market for the exports of many countries and will become Europe’s largest source of cheap and efficient labor and hence a new and formidable competitor in light manufacturing.

The war has greatly changed relative production costs in different countries, and these changes are continuing. The price of labor, for example, has increased about 40 per cent in the United States, 50 per cent in Britain, 50 per cent in Sweden, and more than 100 per cent in France, the Middle East, Mexico, and India. Exchange rates between countries are far out of line with the real values of currencies and do not reflect the relative competing power of different countries in international trade. The French franc, for example, is officially priced at several times its real worth, virtually excluding France from exporting. And the dollar is undervalued relative to most currencies. This increases the difficulties of other countries in selling to us and hence limits their ability to buy from us.

Debtor-creditor relationships between countries have radically changed. The British, having lost about half of their foreign investments and a fourth of their shipping, must increase their exports in physical volume by roughly 50 per cent over 1938, simply to pay for the raw materials needed by their plants at full employment and the food needed to restore the pre-war standard of living. On the other hand, India and the countries of the Near East and of South America have acquired pound balances in London equivalent to about 16 billion dollars — and, in many cases have acquired huge additional dollar balances and gold holdings.

Plainly, world trade cannot be rebuilt simply by restoring pre-war flows of goods. Large new flows of trade must be developed to fit the new distribution of producing capacity, the new distribution of demand, the post-war wage and price structures. Many countries, such as Sweden, Britain, Belgium, the Netherlands, Australia, and Canada, depend upon imports for one fourth to one third of their consumption. Until international trade again becomes large, the standard of living in most of these countries will remain below the pre-war level.

Furthermore, countries which are deeply concerned about export markets are likely to be slow in removing wartime restrictions on imports and are likely to impose new restrictions whenever their imports rise rapidly. In such a world, economic expansion will not easily occur — or at least not so easily as it should. Expansion is important not only for economic reasons but in order to provide a climate in which good will flourishes, because all of us depend upon the hope of better things tomorrow to soften the disappointments and conflicts of today.

What contribution can the United States make toward removing the economic chaos left by the war and toward building a stable and expanding world economy?

A major impediment in restoring world trade is created by the difficulty of the world in selling to the United States. In 1850, nearly 20 per cent of the commodities (exclusive of services) consumed in the United States came from abroad; in 1880, over 10 per cent; in 1937, only 6 per cent. In the sixty years before the Second World War the national product of the United States increased nearly tenfold and imports less than fivefold. The highly industrialized countries of Europe find it particularly difficult to sell to us. In 1937, exports of all Europe to this country totaled less than 900 million dollars — considerably less than the domestic sales of a single corporation such as General Motors. Britain, our best customer in 1937, sold us less than 125 million dollars. If other countries of the world could visualize a large increase in sales to the United States, their fears for their export markets would greatly diminish, and they would see the possibility of obtaining needed American machinery for their factories, mines, farms, and utilities.


Two principal obstacles have hindered the world from selling to the United States: the superior efficiency of most branches of American industry, and our high tariff. Few Americans realize how great is the managerial and engineering superiority of American industry — or the problems it creates for the rest of the world, or what responsibilities it imposes on the United States. Before the war, the annual product of the world was roughly 280 billion dollars. Of this amount the United States, with 6 per cent of the population, and using less than 6 per cent of the manhours, produced over one fourth. Soon the United States will probably be producing about one third of the world’s goods. The tariff of the United States, though less restrictive than the tariffs, exchange controls, and other regulations maintained by many countries, is so high that imports of dutiable goods are small. About 60 per cent of the imports of the United States come in duty-free.

Is there not a good prospect that other countries may acquire much needed markets either by buying more of certain products from each other instead of from the United States or by selling more to the United States? The rest of the world is likely to take considerably less petroleum and cotton from the United States than before the war. The high levels of employment and production that are in prospect (about 57 million people working and a gross national product of over 180 billion dollars rising within a few years to over 200 billion dollars) should mean imports of 6 billion dollars or more, compared to 3 billion dollars before the war.

The gradual exhaustion of natural resources in the United States will help to increase imports. Timber is already being consumed far faster than it is being grown. A high level of residential construction, virtually assured for the immediate post-war years, will make large imports of timber desirable. A great rise in imports of petroleum would be in the national interest. The United States has two fifths of the world’s known oil reserves, but is taking out its oil nearly twice as fast as the rest of the world. Commercial reserves of iron ore, lead, zinc, copper, and bauxite have been so greatly reduced that the United States, should plan to meet at least half of its current needs by imports.

Possibly the problems of restoring world trade will be solved in a large measure by a rapid gain in industrial efficiency in various countries, which will enable them to undersell the United States in certain fields and to increase their sales to the United States. The Potsdam settlement, by indirectly forcing the emigration of many German businessmen, technicians, and skilled workmen, may help some countries to found new and efficient industries.

Possibly the British Labor Party will succeed in greatly raising the efficiency of British industry. Britain is fortunate that the Labor Party is in power at this critical time when the country so desperately needs to reduce costs and to acquire a share of new and expanding markets such as automotive products and electrical goods. The avoidance of bilateralism in international trade depends above everything else upon the success of the British in winning new markets for themselves. The Labor Party, better than any other, should be able to win the coöperation of the unions in raising the efficiency of industry.

Unfortunately, it is unlikely that other countries will catch up with the United States in industrial efficiency. Indeed, the managerial and engineering superiority of American industry seems to be growing. Between 1871 and 1907, output per man-hour in manufacturing and mining America rose about 80 per cent, in Britain about 35 per cent. Between 1907 and 1936, it rose 95 per cent in the United States and 70 per cent in Britain. During the last forty years, Germany made a somewhat poorer showing than Britain.

Several principal obstacles hinder other countries in matching the efficiency of American industry. One is the fact that most countries do not take readily to American methods of making interchangeable parts to standard tolerances — the basis for extreme specialization of equipment and men. A second reason is that no other country, except possibly Russia, will be able and willing to keep pace with the United States in supporting technological research. Such research is growing by leaps and bounds in the United States and will grow even faster in the future. A third handicap of most countries is that they lack large enough markets to support up-to-date technology, especially in heavy industries. No country of Europe, for example, has a modern steel industry by American standards. Brazil, with the help of money from our government, has recently built a steel mill, but production costs will be about three times as much per ton as in the United States.

Some countries may be able to reduce their handicap, at least temporarily, by concentrating all production in one enterprise which uses larger and more up-to-date units of equipment. This concentration might be achieved through nationalization. Europe might build a low-cost steel industry through an internationally controlled cartel. The gains, however, would be incomplete and temporary because industries run by government bureaucracies or public corporations are not likely to be highly dynamic — unless governments learn how to discover men of unusual originality, ability, and initiative in the ranks and move them quickly toward the top.


MANY people believe that the United States can make an adequate contribution to the restoration of world trade simply by being prosperous itself. This is not true. Though the demand for imported goods rises and falls with the level of domestic production and employment, our high tariff prevents increases in domestic incomes from producing an appreciable rise in the demand for most foreign goods. Nearly every manufactured product is protected by a duty which is so high as to be prohibitive, and the same is true of many products of mines and a large part of agricultural production. The British excel in producing woolens and worsteds and are able to sell many grades at prices considerably below prices prevailing in the United States. So high are our duties, however, that before the war less than 2 per cent of the woolens and worsteds used in this country were imported. Indeed, the tariff cuts off most of the great American market from the world economy almost as completely as Japan was cut off before the landing of Commodore Perry.

Reductions in the tariff would raise our standard of living by bringing about a more productive use of labor and capital within the United States. Even in a country with such a wide variety of resources and climates as the United States, a domestic production of 94 per cent of the commodities we consume (the pre-war rate) does not represent an effective application of geographical division of labor. Indeed, it is estimated that the United States could advantageously import at least 10 per cent, and probably 15 per cent, of its commodity consumption.

At a gross national product of 180 billion dollars (of which about 130 billion dollars would be commodities) 10 per cent would indicate commodity imports of 13 billion dollars. If the gross national product rose by 1960 to 250 billion dollars, and commodity production to 180 billion dollars, a reasonable standard for imports would be 18 billion dollars a year. Such an expansion of imports would not only raise the efficiency of American industry but would enable the rest of the world to count on steadily expanding export markets. What are the chances of attaining this goal?

Many people believe that reductions in duties would produce little increase in imports. A recent report of the Tariff Commission, for example, estimates that even a reduction of 50 per cent in present duties would raise imports by 1953 less than 15 per cent above the level that might be expected with duties unchanged. Imports would be less than 7 per cent of the domestic commodity production.

In my judgment these estimates of the Commission greatly understate the long-run effect of cuts in our tariff. Some time is required for production facilities and the flow of trade to change in response to changes in duties. Reductions in duties will permit imports of goods in the moderate price brackets. It is for such commodities that American markets are largest, most rapidly expanding, and most sensitive to changes in price. Significant is the fact that between 1920 and 1937 the physical quantity of dutiable imports increased only 17 per cent, but the quantity of dutyfree imports increased over 92 per cent. It is difficult to believe that American industrial efficiency is so superior that, with American duties low, the rest of the world would not be able to sell us at least 10 per cent of the commodities which we consume. This would mean imports of over 15 billion dollars a year soon after 1950.

Are widespread reductions in the American tariff politically possible? The President has authority to make them, but will the public permit him to use it? Under the Hull trade agreements, about a thousand duties, affecting nearly half of the dutiable imports in 1937, have been cut, but most of the reductions have been small or unimportant.

Support for reform of the tariff has gradually been growing as employers and workers in our most efficient industries (automobiles, electrical equipment, radio, farm implements, Diesel engines, business machines, and others) gradually awaken to the fact that their sales abroad have been limited by the inability of foreigners to sell to us. The years immediately after the war are an ideal time to make further reductions in duties, because the great expansion of domestic demand will in most instances make possible an increase in domestic production even in face of a great cut in duties. For example, in the case of woolens and worsteds the Tariff Commission estimates that even a 50 per cent reduction in duties would leave domestic production from one fourth to one half above pre-war production. On the other hand, if the present opportunity to make substantial reductions in duties is lost, much capital and labor will be wasted after the war by being used to expand high-cost and inefficient industries.

The United States is under great pressure to make gifts to the rest of the world — or at least to make “loans” on which the world cannot easily pay a return. Rich and productive as we are, we cannot afford to do this. Nor would it be good for our relations with other countries for us to do so — especially for us to make gifts under the guise of loans. The United States, however, can do something much better. We can increase our wealth and the wealth of the world by opening our great closed markets to trade and bringing about a more productive distribution of capital and labor. A reduction in our duties, beneficial as it would be to us, need not be made unconditionally. With by far the largest markets in the world to open up, the United States will be able to be the champion of liberalism and non-discrimination in world trade.

It is high time that the American people adopt a new attitude toward tariffs and protected industries. A protected industry is receiving a special privilege which can be justified only if the industry serves a special public purpose. The experience of the war indicates plainly that, except for a few key industries, national security will rarely require that a protected industry be able to supply more than half of our domestic requirements. A sensible rough-and-ready rule in tariff negotiations is that duties which limit imports of a given commodity to less than one half of domestic production are too high.


SOME people believe that a satisfactory foundation for expanding world trade would be provided (1) by the stabilization fund proposed in the Bretton Woods agreement, and (2) by huge loans from the United States or from some intermediate organization such as the proposed Bank for Reconstruction and Development. Neither the Bretton Woods Fund nor large-scale lending comes to grips with the essence of the problem. The Bretton Woods Fund would be useful in helping countries tide over temporary shortages in exchange. It would not, however, be a remedy for the chronic shortage of dollar exchange which arises from the difficulties of the rest of the world in selling to the United States.

Incidentally, the man in the street has been sadly misled into believing that the Bretton Woods Fund would give immediate help in restoring world trade. Only the United States has thus far ratified the agreement. Furthermore, the Fund cannot start operating until currencies have been more or less stabilized. After the upheaval of the war, several years will be required to test the competing power of the different countries and to indicate the appropriate rates of exchange. No one would think of stabilizing the franc, for example, at its present value, and no one knows what the ultimate value of the franc will be. The same holds true of many other currencies, including the pound.

Loans have their place in restoring world trade, particularly during the first year or two after the war when war-devastated countries are struggling to restore their productive capacity. It is important, however, to keep the quantity of loans moderate, to keep the quality high, to avoid using loans as a substitute for a real attack on problems, and to make a clear distinction between loans and gifts.

Loans will do little good when made to countries which lack stable governments. Nor do loans solve the problem of countries which are unable to hold their own in international trade because of lack of enterprise or lack of managerial skill, or because of high production costs. The mere fact that a loan would enable the borrowing country to increase its production substantially or to raise its standard of living does not alone make the loan a sound one. Loans are indicated only when they would also enable the borrowing country to improve its position in international trade either by selling goods abroad below prevailing world prices or by producing at less than world prices and thus reducing its imports.

When loans are skillfully made, even small or moderate loans will do much good because they will help eliminate bottlenecks which are preventing idle men and idle plants in the borrowing country from going to work. Some of the most important impediments to production, however, can be little affected by loans. For example, loans can do little to cure two of the most desperate shortages in Europe — coal and transportation.

A principal reason for the scarcity of coal in Europe is the shortage of miners. Another reason is uncertainty concerning the future of many mines, especially the mines of the Ruhr. No one is willing to spend large sums on repairing and replacing mining equipment when future ownership of mines or their access to markets is unsettled. Most important of all is the shortage of transportation. The repair of ports, bridges, track, and railroad equipment, however, must in the main be done by domestic labor — though loans to finance importation of machinery, trucks, and locomotives would hasten the process.

Many Americans would have the United States lend huge amounts abroad in order to capture larger foreign markets and to provide more employment in this country. This would be a grievous mistake. Employment problems should be solved by appropriate domestic policies, not by the equivalent of “exporting” unemployment. A strong case for loans from the United States can be made provided they are accompanied by substantial reductions in our tariff — reductions which would eventually lead imports into this country to exceed exports. Loans without reductions in our tariff would contribute little to a real solution of the economic problems of the world.

The United States should be especially cautious about making loans because the superior efficiency of our industries makes it difficult for borrowers to export enough to pay us interest. When raw materials are supplied to the war-devastated countries on credit, the United States should insist that all countries supplying raw materials participate heavily in advancing the credits.

Especially during the first several years after the war, there is danger that large loans abroad will aggravate the problem of controlling prices here. The demands for investment-seeking funds in this country will be very large. These demands will come partly from business corporations (which will either sell their accumulations of government securities or borrow directly) and partly from the government, which will be called upon to redeem substantial quantities of war-savings bonds. These large demands for funds will be partly met by an expansion of bank loans which will cause a rise in bank deposits. Large loans to other countries would simply force still greater borrowing from the banks and would thus add to the difficulties of keeping prices stable.

The world emerges from the Second World War with the firm intention of avoiding the muddling, the issue-dodging, and the wishful thinking that characterized the period between wars. International economic policies present the first great test of the new good resolutions. There is danger that many conscientious Americans who wish this country to play a coöperative role in the world will be led by the adoption of the San Francisco Charter and the Bretton Woods agreement to believe that we have now become internationalists. Each of these steps is a relatively easy one to take. Joining an organization for maintaining peace or for promoting more stable exchanges hurts no powerful economic interest.

Each of these steps, however, falls far short of meeting the essential problem of building an expanding world economy. Each leaves the greater part of the huge American market—where nearly one third of the world’s purchasing power is to be found — cut off from the rest of the world. If this great market could be opened up to the world, the stimulus to expansion in all countries would be tremendous.

No sacrifice of national interests would be required. In fact, labor and capital would be more productively used and the rise in the American standard of living in the United States would be accelerated. And opening up our market is the only way in which to move labor and capital out of industries in which our relative superiority is small or in which we have no superior efficiency. What is required is a new kind of thinking: we must think in terms of national, not sectional, interests, and accept the responsibilities which go with possession of the largest and most efficient industries of the world and possession of the world’s largest outlets for goods. Breaking down the barriers which cut off our markets from the rest of the world is the acid test of the country’s abandonment of isolationism.