Import Quotas: A Shortsighted Policy

BY HUGH G. J. AITKEN

IN RECENT months the foreign trade policies of the United States have taken a decisive turn toward restrictionism. Barely a shadow now remains of the crusading fervor that enveloped the cause of liberal trade in the post-war years; instead our trade policies have become, in fact if not in name, policies of protection. Highlighting the change are the import quotas on oil, zinc, and lead. Discussed but little in this country, these restrictions are nevertheless fraught with questionable consequences for the economic health of the United States and for its relations with the other countries of the free world.

In 1957, with the Suez crisis safely past, we were told that it was necessary to restrict the importing of oil into the United States. Oil imports were therefore restricted by a scheme that was at first “voluntary,” in the sense that the government threatened to use compulsion if the importing oil companies failed to do what it wanted. Subsequently, when certain large importers proved uncooperative, the restrictions were extended in coverage and made mandatory. Similar restrictions were also placed on the importing of lead and zinc, though in these cases the restrictions were never voluntary. In all three instances the justification for interfering with the normal flow of trade was the alleged probability that the national security would be adversely affected if the restrictions were not imposed. In the case of the oil restrictions, the “voluntary" scheme was further defended on the somewhat naïve ground that it involved little or no interference with the free enterprise economy.

Despite the fact that some of the largest American oil companies have very extensive holdings of oil reserves in other countries, and that a number of American zinc and lead refiners depend on unrestricted imports of ore to maintain their operations at full capacity, the government’s program of import restriction was accepted with surprisingly little domestic protest. Elsewhere, however, the reaction was more violent. Canada, Australia, Mexico, Peru, and Venezuela all protested vigorously, but with little effect.

The way in which the restrictions were imposed is significant. The classic technique would have been a sharp increase in the tariff. This is, in fact, what the Tariff Commission recommended in the case of lead and zinc. The method chosen, however, was to impose quotas, setting an upper limit on the amount that each importing company might bring into the United States annually. The advantages of this technique are obvious. The amount by which imports will be cut is definite and certain, which is an advantage for domestic producers in the United States. The severity of the restrictions can be increased or reduced by administrative decision, without the need for congressional maneuvers, which is an advantage to the Administration. Most important of all, the new policy seems superficially to be less at variance with the principles of free international trade, to which the Administration is nominally committed, than would a sharp increase in import duties. From the point of view of the exporting countries, however, the difference is negligible: access to the United States market has been rendered more difficult, the unpredictability of United States foreign economic policy has been once again demonstrated, and American economic nationalism has triumphed over the aspirations or needs of America’s trading partners and allies.

Authority for imposing restrictions of this kind stems from Section 7 of the Trade Agreements Extension Act of 1955, which empowers the President to “adjust” the imports of any article if he believes, after investigation, that the article is being imported “in such quantities as to threaten to impair the national security.” Implicit in this statute, though nowhere spelled out, is a definition of the national interest. In practice the clause has been interpreted as giving the President authority to restrict imports of any commodity if it appears that the interests of a domestic industry whose continued operation is important for national defense are being threatened.

But is it not possible that our national interest and national security can be defined in other, less restrictive ways? For example, if the preservation of a certain industry is considered vital, is it necessarily required that it be preserved within the political boundaries of the United States? If the overriding consideration from the defense point of view is the availability of a certain resource in time of war — rather than merely its physical presence within the United States — might it not be in the national interest to encourage its development in contiguous areas to which the United States is certain of having free access? And is not this particularly relevant if the resource on which the industry is based happens to be available elsewhere at lower cost than in the United States? It is hardly necessary to raise more complex issues, such as what weight should be attached to the good will and welfare of friendly allies. The primary question is whether the defense of the United States requires that essential material resources be exploited within the political boundaries of this country.

This is far from being a purely academic question. Its relevance to current policy is particularly clear in the case of Canada. It is a recurrent complaint among Canadians that the United States takes them too much for granted. By doing so we injure our own interests as well as those of Canada. Let us remind ourselves that Canada is a major producer of lead and zinc ores; that it has in the last ten years developed into an important source of oil and natural gas; that these resources are available for export to the United States — in fact, must be exported if the Canadian industries are to remain prosperous. Add to these considerations the facts that Canadian producers of these resources can in the majority of cases produce their output at lower cost than can their opposite numbers in the United States; that the transport routes which link them to the American consumer, whether pipeline or railroad, are part of an integrated continental transport system, not as liable to interruption in time of war as are vulnerable sea routes; that the Canadian government is anxious, for balance-of-payments reasons, to increase exports to the United States — put all these facts together, and it becomes difficult to understand how in any conceivable circumstances it could be in the national interest of the United States to cut itself off from this storehouse of lowcost, high-quality raw materials.

Certainly it would be unwise, for strategic reasons, for the economy of the United States to become dependent upon imports of oil from a politically unreliable area, such as the Middle East. But what sense is there in applying the same logic to Canada? The Canadian and United States air defense systems are now completely integrated and operate under a single command. Our Distant Early Warning radar system is located in Canada and can perform its vital function only by Canada’s freely given consent and cooperation. In terms of continental defense planning, Canada and the United States are a single unit. There may be other arguments for restricting imports from Canada, but the argument that it is dangerous to do so for strategic reasons is nonsense.

The only justification for applying the same policies to sources of supply in both the Middle East and Canada is the principle of nondiscrimination. But discrimination is built into the strategic necessities of continental defense. All sources of imports are not equally secure and equally available. To treat all alike is to sacrifice our interests for a principle which must be considered obsolete.

Discrimination, in short, is built into the logic of our defense strategy. Belated recognition of this fact was shown at the end of April, 1959, when imports of oil reaching the United States over land — that is, from Canada or Mexico — were exempted from all quota restrictions. Whether this reversal will repair the damage done to our relations with these countries is doubtful. The fact remains, however, that the necessity for discrimination has been recognized. Presumably future import restriction schemes will be framed with this in mind.

IT IS purposeful, however, to examine the logic that underlay the imposition of the quotas in the first place. What justification was given for restricting imports of foreign oil? Memorandums submitted to the President by the Office of Defense Mobilization and reports of the special cabinet committee on oil imports make it clear that the national security argument was decisive. The emphasis in this argument was placed on the necessity for conserving not American oil resources but the American oil industry, which is a quite different matter.

On the face of it, if American oil resources are dwindling, measures to conserve these resources, so that they may be available in the event of some future emergency, might well seem an appropriate policy. Such a policy would normally lead to the maximum use of imported oil at present with a view to saving our own scarce resources from depletion. This would be real conservation. But the policy actually adopted is the very opposite of conservation. Restriction of imports will cause a rise in the domestic price of oil; a higher price of oil, instead of conserving our scarce resources, will encourage a faster rate of depeltion, as domestic oil producers in the United States expand their share of the market to compensate for the excluded imports.

The true situation, however, is not that simple. Undiscovered oil in the ground is of no use to anyone, nor can it be called a national resource in any emergency. If we in the United States — so the argument runs — wish to be assured of supplies of oil in the future, then we must encourage the exploration for oil now. This means giving an incentive to our domestic oil companies to search for and develop new wells and new fields, and this incentive cannot be provided if imported oil is permitted to take over a larger share of the domestic market. Restrictions on oil imports will raise the domestic price and provide the necessary incentive for exploration. The point to be emphasized is that the justification for import quotas is expressed in terms of conserving an industry, not a resource.

This was made explicit in the report of the President’s Special Committee to Investigate Crude Oil Imports on July 29, 1957. The authors of this report considered and dismissed three possible alternatives to import restriction:

1. To import foreign crude oil and store it in this country in depleted fields or elsewhere (discarded as costly and very difficult).

2. To enlarge government participation in exploring for oil reserves which, when discovered, would not be put in production (discarded as “contrary to the principles of free enterprise” and costly to the government).

3. To encourage increased imports in order that our own natural resources might be conserved.

This third possibility was discussed in the report at greater length than the others. In dismissing it, the members of the committee introduced a distinction between two kinds of mobilization base that, in its full implications for trade policy, cuts very deep indeed. The report stated: “A policy of encouraging importation as a means of conserving our petroleum resources would mean that in an emergency the Nation would be confronted with all of the liabilities inherent in a static, as contrasted with a dynamic mobilization base, including the delays, waste and inefficiency that accompany efforts to strengthen any part of the mobilization base on a ‘crash’ basis.”This distinction between a static and a dynamic defense base can, by logical extension, be used to justify the preservation, within the boundaries of the United States, of any industry whatsoever that contributes in any way to defense production. Resources that merely exist but are not currently being exploited cannot, in the event of emergency, be made available for use without a serious and possibly fatal time lag. Consequently it is necessary to maintain, on a continuing basis, the exploitation of any resource that may be required in emergency.

One may sympathize with the committee’s objectives and yet see a certain dilemma in their position. It appears that an industry can be conserved only at the cost of more rapid depletion of the resource on which it is based. Depletion of a resource shows itself in rising real costs of production and in rising prices to the user. A determination, therefore, to conserve a vital industry in the interests of a “dynamic” mobilization base means accepting progressively higher costs for essential raw materials and a more rapid rate of resource depletion. These are consequences that can hardly be called desirable for long-run economic health.

FORTUNATELY, there is at least one alternative: to draw on the resources of contiguous areas, such as Canadian oil. The Canadian oil industry, still in its infancy, has already proved recoverable reserves of around 3 billion barrels, and only a fraction of the potential oil-producing area has so far been tapped. Development costs are lower in Canada than in the United States, and the average yield per well is higher. It now costs between $1.15 and $1.50 to find and develop a barrel of oil in the United States; recent Canadian experience gives an average of $1.03. Production costs in Canada average 45 cents a barrel, as compared with about 70 cents here. Canadian fields are of recent discovery, and their potential yield is high. Official estimates of Canada’s crude oil reserve potential have conservatively set the figure at 40 to 50 billion barrels. In recent years one out of every five new wildcat wells in western Canada has resulted in an oil find, as compared with a batting average of one out of nine in the United States, and newly discovered resources per exploratory well drilled have averaged 70,000 barrels in Canada as against 40,000 barrels in this country.

These oil discoveries have enlarged the resource base not only of Canada but also of the United States. The Canadian oil industry has been financed largely, though not entirely, by United States capital: about four fifths of the total investment, it is estimated, originated in the United States. Many of the larger companies involved are affiliates or subsidiaries of United States corporations, and the industry depends on sales in United States markets. two pipelines carry western Canadian crude to refineries in the United States. One of these, the Transmountain Pipeline, would never have been built had not sales to the Anacortes and Ferndale refineries in the state of Washington been confidently expected. The other, the Interprovincial Pipeline, serves refineries in Michigan, Minnesota, and Wisconsin, as well as Canadian refineries in southern Ontario. Any restriction on the flow of Canadian crude to the United States is immediately reflected in a decline in well-head prices in western Canada and a slowing up of exploratory and development drilling. This is an industry whose output will be available to the United States in all circumstances.

Considerations that are relevant for oil imports apply with even greater force to the quotas on zinc and lead. Imports of both these vital metals have been cut to 80 per cent of the 1953-1957 average. The arguments against restrictions on lead and zinc are much stronger than in the case of petroleum. In the case of lead and zinc, the United States is already a deficit nation and since the start of World War II has depended on imports to meet roughly one third of its requirements. Prospects for the future are that this dependence on external sources of supply will increase. There is still, of course, plenty of lead and zinc ore to be mined in the United States; we could meet our own requirements if we were to pay a price high enough to make the processing of low-grade or relatively inaccessible ores worth while, or we could, for some end uses, turn to substitute materials. But the cost would be a serious retarding of our industrial growth and a fall in our standard of living.

Canada and Mexico have large reserves of ore: Canada’s developed reserves of lead, for example, are estimated at 6.5 million tons, as compared with 2.5 million in the United States, while its zinc reserves are set at 14 million tons of metal, as against about 8.5 million in this country. These reserves can be converted into usable metal at costs lower than most operators in this country can match. Average labor costs per ton of ore are actually higher in Canada and Mexico than in the United States, but costs per unit of metal produced are lower because ores mined in this country have a much lower metal content. Faced with ever leaner reserves and rising costs, the American industry can meet Canadian and Mexican competition only by government-imposed restrictions on imports, either by tariff or by quota.

When, in an otherwise healthy and dynamic economy, a particular region or industry finds itself in trouble through no fault of its own, a reasonable case can certainly be made for temporary measures of assistance. But to take measures designed to maintain the status quo indefinitely is in effect to subsidize a particular interest at the expense of the taxpaying public. The circumstances which may conceivably justify a permanent subsidy of this kind arise when it is urgently necessary for national security that a particular resource be exploited. What is essential is that it be possible, even in emergency, to maintain the flow of production from oil well or base metal mine to refiner, to fabricator, to consumer with the minimum of interruption. But this does not mean that the flow must originate in the United States.

It is believed by some people that import quotas are preferable to an increase in the tariff because a quota is easier to get rid of than a tariff. Spokesmen for the Administration indicated in this connection that the quotas on lead and zinc were a temporary arrangement, to be succeeded by some more permanent method of price fixing. History suggests, however, that restrictions feed on restrictions. Certainly nothing has been said so far to suggest the existence in official circles of a disposition to think the philosophy of restrictionism through to its logical conclusion. But there can be no doubt that the consequences of mistaken policy in this area are likely to be of the utmost seriousness in the long run. This is not a matter of raising the tariff on clothespins or clover seed. In its most recent manifestations, restrictionism has been applied to some of the basic raw materials of American industry. A nation that willingly accepts artificially high prices for its industrial raw materials is risking not only its standard of living and its ability to compete in world markets but also its ability to defend itself. We cannot afford deliberately to weaken our industrial substructure; yet this is what we are doing when we prevent our industries from drawing their raw materials from sources that are both secure and cheap. We cannot afford to alienate our immediate allies, particularly those on whom we rely for long-range warning against attack; yet this is what we do when, in response to domestic pressures, we begin to whittle away at their sales to us. The United States must learn to accept the fact that, in terms of many essential industrial raw materials, it is a deficit nation and will become ever more so. Acceptance of this situation entails adopting policies that are consistent with it.