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TARIFF AIDS AMERICAN ENTERPRISE DEXTERNORTH Arthur D. Little, Inc.
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HE wartime shortage of chemicals, together with our wealth of natural resources and the money and ability to develop them, gave tremendous impetus to the growth of the chemical and allied industries in 1914-18. The safeguarding of those investments adapted to peacetime needs and the incentive for subsequent development may be credited in no small measure, however, to our protective tariff policy. Not only the growth in physical size, but in diversification of the industry justifies the wisdom and foresight of our lawmakers in passing the necessary PIOtective measures. Reciprocal trade agreements also have been given a prominence which makes appropriate a revieTY of the important role which tariffs have played in the development of the American Way during the quarter century since 1914. The 1914 Census of Manufactures showed a value of 8173,269,000 for chemical products, and of $1,285,760,000 for chemical and related industries combined. In 1937 the respective values (allowing for changes in classification) had grown to $932,750,000 and $3,721,531,000, representing increases of 434 and 190 per cent in the groups. In the earlier years roughly five sevenths of the strictly chemical portion of the industry consisted of heavy chemicals and the remainder of organic chemicals. The latter group consisted largely of S U C products ~ as acetic acid, citric acid, fatty acids, glycerol, celluloid, all derived by relatively simple processing of animal and vegetable materials; a few synthetics such as chloroform, ether, various esters, formaldehyde, vanillin; and some dyes made principally from imported intermediates. ORGANIC INDUSTRIAL CHEMICALS
The virtual cessation of imports from Germany and greatly restricted trade with the allied powers compelled development of an organic chemical industry not only for our own needs but for those of our allies. The public was acutely aware of the ensuing shortages in dyes and in certain medicines. Tremendous handicaps, such as the absence of a byproduct coke industry to provide the necessary crudes for dye intermediates, and lack of knowledge of making any but a few dyes were overcome, and, with the aid of the seized German dye patents, a well-rounded dye and coal-tar products industry was established. In 1914 American dye production amounted to 6,619,729 pounds valued a t $2,470,096, or 37.6 cents per pound, and comprised about 145 relatively simple and inexpensive types. In 1917, the first year for which detailed statistics are available, the output was 45,977,246 pounds valued a t $57,796,228, or $1.26 MAY, 1939-Page
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per pound. During this war year of high prices the number of dyes produced was 195. By 1937 the number had increased to 731, the quantity to 118,046,127 pounds, and the value to $64,612,914, but the average value had decreased to $0.55 per pound. In contrast to the small proportion of the consumption of dyes supplied by domestic production in 1914, the amount supplied in 1937 was about 97 per cent in quantity and 95 in value. The new industry required little protection during the years of the war, but anticipating competition to come, the Revenue Act of 1916 provided temporary protection in the form of higher import levies on dyes, intermediates, and certain other newly developed synthetic organics. This was superseded by the Emergency Tariff Act of 1921 which prohibited the importation of such products except when satisfactory prices, quality, and terms of delivery could not be obtained from domestic sources. The Act of 1921 remained in force until superseded by the first general postwar tariff revision, the Tariff Act of 1922. On coal-tar intermediates and finished products the act of 1922 provided the first application of the so-called American valuation method of assessing duties and was continued by the Tariff Act of 1930 which, with modifications, remains in force. The American valuation method has been of particular value to the dye industry because of the certainty of protection which it affords. On dyes not produced in this country, only a moderately high duty is levied based on United States value, which is nearly equivalent to foreign value, but as soon as domestic production of a dye comparable to the imported product commences, then the latter becomes dutiable at a higher rate based on the American selling price of the domestic product. Thus the marketing of new types of dyes is assured in advance of the exact amount of protection to be received and foreign competition is unable to chisel on duty payments by reduced valuations, while a t the same time imports of non-competitive dyes, principally of the newer and more expensive types, continue in substantial volume. The cheaper dyes are dutiable a t higher equivalent ad valorem rates than the more expensive dyes. The duty on dyes was automatically reduced in September, 1924, by provision of the Tariff Act of 1922, from 60 per cent ad valorem and 7 cents per pound to 45 per cent ad valorem and 7 cents per pound, and that on intermediates from 40 per cent and 7 cents per pound to 30 per cent and 7 cents per pound. In the reciprocal trade agreement with Switzerland the rate on dves was further reduced A A to 40 per cent ad valorem (but not less than 3.5 T H E AMERICAN WAY
cents per pound and 22.5 per cent ad valorem) effective February 15, 1936. This change seems to have been accomplished without apparent serious%effectson the domestic industry. The benefits are withheld from Germany because of her discrimination against our commerce. An appreciable portion of our dye output is by foreigncontrolled corporations. Had prewar tariff rates on dyes been in force, these plants might never have been erected, and the dyes which they produce would have been imported, as in the past. Nov7, as soon as demand for an im reaches tonnage proportions, production is transf abroad to the plants in this country. When one to the necessary crudes and intermediates for these dyes, the effect on employment in this branch of the chemical industry is considerable. Dyes are not the only branch of the coal-tar products industry which have amply demonstrated the wisdom of the relatively high tariff protection accorded them. I n 1917, the domestic industry produced only 23 medicinals of coal-tar origin, valued a t $5,640,000 and averaging $2.33 per pound. Twenty years later the number of such products had increased to 142 with a value of $11,496,000, but an average price of only $0.96, representing an increase in volume of nearly sixfold and an average price reduction of nearly 60 per cent. Outstanding among the price reductions have been aspirin, from $5.49 to $0.51 per pound, arsphenamine from $3.50 to 30 or 40 cents (retail) per ampoule, and phenolphthalein from 49.65 to $0.85. Prewar prices of these products were substantially higher than today's, and Germany's ability to command high prices by virtue of her monopoly in these essential medicinals has been broken. The extent of the benefits of lower prices and larger range of products to public health cannot be estimated. As in the case of dyes, some of the synthetic medicinals are produced by foreigncontrolled corporations; others are produced under license from foreign manufacturers. In the same period the production of antioxidants, so important in prolonging the life of automobile tires, and of vulcanization accelerators has grown from exceedingly small dimensions to over $8,000,000. Synthetic perfumes and flavors have expanded from almost nothing to nearly $4,000,000, photographic chemicals to $1,500,000, and textile assistants to $750,000. The comparatively new industry of synthetic resins, including those derived from both coal-tar and noncoal-tar sources, has increased from a production of 1,644,000 pounds valued at $1,352,000 in 1921 to 162,105,000 pounds with sales of 127,175,000 pounds valued a t $25,846,000 in 1937. Simultaneous with this development was that of the necessary plasticizers for these resins. Sales of phthalates alone in 1937 amounted to $2,500,000. The courage to undertake the immense amount of research and development work underlying this growth is attributable in no small degree to the tariff protection which these products enjoy. Several types of synthetic resins are produced in the United States under license from foreign producers. Under less favorable tariff rates these arrangements doubtless would not have been consummated. Instead, the foreign resins would have been imported, and an appreciable portion of our plastics industry, together with the production of the necessary raw materials, would be nonexistent today. Cellulose plastics likewise enjoyed an immense growth. I n 1914 there was but one type, cellulose nitrate, sales of the partly finished material of which amounted to $3,778,374. By 1935, in spite of the threatened competition of cellulose acetate, sales had grown to $10,682,358; those of cellulose acetate totaled $7,986,489. Since that time commercial production of other esters of cellulose and of ethylcellulose has commenced. 568
Other branches of the organic chemical industry also have made impressive showings. " I n the sixteen years from 1921 to 1937 the noncoal-tar branch of the synthetic organic chemical industry expanded more rapidly than the aromatic branch, showing phenomenal increases in production from 21,500,000 to 2,500,000,000 pounds, and in sales value from $13,750,000 to $119,400,000. Perhaps the most notable instance in this field is that of the derivatives of acetylene, ethylene, and propylene first provided for in the Tariff Act of 1922 a t 30 per cent ad valorem and 6 cents per pound, and continued in expanded form in the act of 1930. I n 1922 nearly all the products concerned were in the developmental stage, but by 1938 over a hundred products worth many millions of dollars were in commercial production, with many others in the research stage. The most widely publicized product in this group is ethylene glycol as an antifreeze. Others include diethylene glycol for solvent and other uses, vinyl chloride for plastics, the line of Cellosolve solvents, the ethanolamines as emulsifiers, solvents, and chemical raw materials. Of related origin but dutiable elsewhere are many synthetic alcohols, ketones, esters, ethers, and certain organic acids, in which output has expanded enormously. The rates of duty on some of these products have been reduced under the trade agreements program. Like the prices of dyes and synthetic medicinals, those of the new organic chemicals as well as many of the older ones have almost invariably declined as enlarged demand and technological improvements permitted economies in production. A glance a t quotations shows striking price declines in such products as the various types of synthetic resins, cellulose acetate, cellophane, Neoprene, Thiokol, chlorinated solvents, rubber accelerators and vulcanizers, glycols, and derivatives; and in products far older but now made by improved methods, such as acetic acid and anhydride, citric acid, phenol, methanol, butyl alcohol, amyl alcohol, acetone, formaldehyde, ether, and many others. INORGANIC INDUSTRIAL CHEMICALS The inorganic chemical branch of the industry, although of formidable size in 1914, has not lagged far behind the growth in organic chemicals. Strangely enough, the two most notable achievements of this branch of the industry since 1914 are in fields largely enjoying no tariff protectionnitrogen and potash fertilizer materials. Owing principally to lower prices for nitrogen and potash materials, the American farmer pays substantially less for his fertilizers today than in prewar days. Associated with these developments, however, are related products, such as synthetic alcohols and nitrogen and potash derivatives, production of which has been stimulated by the protection afforded them. The value of primary nitrogen products derived from air nitrogen sources alone in 1935 amounted to $20,860,000, and the unit value of nitrogen decreased from $229 per ton in 1914 to $106 in 1935. Our dependence on imported potash caused prices to skyrocket to more than $400 per ton during the war; but with the discovery and development of our own hitherto unsuspected resources the foreign monopoly was broken. I n 1937 the value of domestic potash salts sold was $7,000,000, the great bulk of which went into fertilizers. The remainder was consumed chiefly in the manufacture of potassium carbonate and bicarbonate,. potassium hydroxide, and potassium nitrate, all of which were formerly obtained from abroad. Without adequate protection, production of these potash compounds probably would not have been undertaken. Other fields of expansion in this field include a complete line of the important barium chemicals, the important fluorides, sodium and potassium dichromates, hydrosulfites, sulfur and chlorine bleaches to cheapen and improve the bleach-
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ing of fibers, cheaper refrigerants to reduce the cost of storing food, new and better insecticides to fight the billions of dollars worth of damage by pests, chemicals for retarding rot and for fireproofing textiles and paper, and a wider variety of types and shades of pigments for paints and varnishes. Domestic production of iodine, duty-free, has been achieved in the face of monopoly and price-cutting tactics by the Chilean producers. FLEXIBLE TARIFF PROVISIONS
The Tariff Acts of 1922 and 1930 provided several new features in rate adjustment or control of imports besides the American valuation mentioned; the most important is the so-called flexible tariff provision. This provides a means for equalizing the cost of production of a domestic product with that of a comparable foreign product plus cost of transportation of each to the principal domestic market. The increase or decrease in duty which may be proclaimed by the President upon investigation and report by the Tariff Commission is limited t o 50 per cent of the existing duty. No product may be transferred from the free list to the dutiable list or vice versa. Should a 50 per cent increase in ad valorem rate be insufficient to equalize the difference in costs, then the basis of levying the ad valorem rate may be changed from foreign valuation (applied to all ad valorem rates except those on coal-tar products) to American valuation (selling price of the American product). Although application of the flexible tariff provision requires much time and detailed work, including procurement of cost data from foreign manufacturers where possible, i t has been wisely applied in many cases, both of increases and decreases in rates of duty. Among the chemicals and related products which have benefited from such increases are sodium nitrite, oxalic acid, methanol, linseed oil, potassium permanganate, barium carbonate and peroxide. Those on which decreases have been applied include phenol, cresylic acid, edible and inedible gelatin, animal glue, olive oil, sperm oil, spermaceti wax, and whiting. For several reasons application of the flexible tariff provision has been virtually inactive since the passage of the Trade Agreements Act in 1934. Decreases in duties touching a nation with which negotiations were in progress would logically be held for trading purposes. When tariff rates have been changed under trade agreements, the possibility of .obtaining relief under the flexible tariff is eliminated. The large number of decreases which have been granted on chemical products under the various trade agreements has thus substantially reduced the number of items on which relief could be granted. Furthermore, the concessions which have been made are more significant than is apparent because of increases which have occurred in American wages, the limitations imposed on working hours, and the increases in taxes. A unique method of rate making was introduced by the provision of the 1930 Tariff Act for synthetic camphor. This required that if, during the six months preceding three, four, and five years after the enactment of the act, the domestic production of synthetic camphor by quantity did not exceed 25,30, and 50 per cent, respectively, of the domestic consumption thereof by quantity, then the rate of duty on synthetic camphor should be decreased from 5 cents to 1 cent per pound. The planning and erection of a synthetic camphor plant and fulfillment of the requirements for maintenance of the 5cent duty is one of the notable accomplishments of the American organic chemical industry. Once a highly speculative commodity under Japanese monopoly and later made synthetically in Germany, camphor is now available t o American MAY, 1939-Page 569
consumers in ample supply a t reasonable prices, free from the former price gyrations which characterized it. This method of rate making might well be tried again where domestic supplies of an important product are lacking and technical and economic considerations warrant establishment of an industry in this country. EGUARDS AGAINST ABUSES
The present antidumping law is the still-enforced Title I1 of the Emergency Tariff Act of 1921. This act provides for withholding entry, except upon payment of special dumping duties, of imported merchandise found to be injuring or likely to injure American industry by reason of its being sold a t less than its fair value, or when i t has been found to have been sold for less than the market value (or in the absence of market value, the cost of production) in the country of origin. The most important instances of invoking this provision on chemical products have been those of butyl acetate from Germany, ammonium sulfate from Belgium, Germany, and Poland, stearic acid from the Netherlands, and phosphate rock from Morocco. The ruling on phosphate rock is the only one of these now in force. Although other chemical products have been excluded from time to time and for varying periods, thus tending to make foreign exporters more cautious in invoicing their goods so as not to conflict with the law, action under this law has been virtually inoperative in recent years. Provision for imposition of countervailing duties upon any products of a country which directly or indirectly subsidizes its exports to the United States is provided in Section 303 of the Tariff Act. It is under this section that the recent action was taken imposing a 25 per cent countervailing duty on dutiable goods imported from Germany. Section 307 of the Tariff Act of 1930 prohibits entry into the United States of goods mined, produced, or manufactured in a foreign country wholly or partly by convict, forced, or indentured labor, unless such goods are not available from domestic sources in sufficient quantities to meet the consumptive demands of the United States. No chemicals have been denied entry, I n the case of Russian goods it has been found impossible to establish proof of the use of forced labor. Further safeguarding of American industry is provided by Section 338 of the Tariff Act of 1930 under which authority is granted to the President to impose new or additional duties not to exceed 50 per cent ad valorem or its equivalent on any or all products of a foreign country which discriminates against the commerce of the United States. The provisions of this section, however, have not been invoked. Provision for action against unfair methods of competition of foreign with American merchandise was first made in the Tariff Act of 1922 and continued in substantially the same form in the Act of 1930. Under this provision the President may, upon investigation and recommendation by the Tariff Commission, exclude entry of articles in the importation or sale of which are employed unfair methods of competition tending to destroy or substantially injure an efficiently and economically operated domestic industry or to restrain or monopolize trade in the United States. Under this provision action of this kind was taken on imports of such chemical products or raw materials as apatite from Russia, synthetic oxides of iron from Canada, and certain forms of Bakelite from Germany. Most of these actions concerned infringement of American patents by foreign manufacturers. The courts have held a t various times that process patents did not come within the scope of the provision, thus limiting the patent aspect of such casep t o product patents. As a result of the court decisions disinclination has been manifested to handle cases involving unadjudicated patents. T H E AMERICAN WAY
RECIPROCAL TRADE AGREEMENTS
It has been shown that the expansion which the iimerican chemical industries, particularly the synthetic organic chemical industry, enjoyed under the artificial stimulation of the war, continued in peacetime directions at a slower but saner pace under the beneficial effects of a protective tariff. Under this system monopolies of materials by foreign countries have been broken, and strong, well-rounded divisions of the chemical industry established. Research was encouraged and capital ventured to produce new products and to create new industries. These new developments have been characterized by almost continuous reductions in prices. Prices of many longer established chemicals are lower than before the war and, in general, the prices of chemicals are relatively lower than those of most other manufactured products when compared over the same period. Fair application of the protective tariff system has been attempted by means of the so-called flexible tariff provision, and safeguards against abuses from imported goods have been erected by the antidumping law and by provisions for unfair methods of competition, exclusion of goods produced under forced labor, countervailing duties on goods imported with benefit of foreign export subsidies, and exclusion of merchandise from countries which discriminate against our commerce; but since the beginning of the trade agreements pro-
gram in 1934 these safeguards have been resorted to with much less frequency. In fact, possibility of relief under the flexible tariff becomes more restricted as new concessions are granted to foreign countries; at the same time the anomaly arises of increased domestic costs resulting from higher wages, shorter hours, and higher taxes. The reciprocal trade agreements program has resulted in reduction of many duties without apparent serious major effect on our chemical industries but with far from equivalent recompense in the form of concessions on chemicals from foreign countries. The effect of rate reductions on products in the manufacture of which chemicals are consumed may have more serious consequences on our chemical industries, but it is still too early to appraise this situation properly. Unlike the totalitarian states, we do not embargo imports or exports of raw materials or finished products except for reasons of neutrality, national defense or conservation, narcotic, quarantine, or other measures enacted for the common good. With protection against an influx of foreign goods produced a t much lower wages than our own, the law of supply and demand is permitted to function (unless exception be made of the methods employed to aid agriculture), and the profit incentive is allowed to operate, all in an orderly fashion for the benefit, not of an autocratic government, but of all the people. Hence we are blessed with our American Way.
EQUIP M ENT MEETS INDUSTRY’S CHALLENGE * r c
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CHARLES F. ROTH Grand Central Palace, New York, N. Y
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N ESSENTIAL auxiliary to the chemical industry is the design and manufacture of chemical equipment-a great American industry in itself. Chemistry, carried forward in the American Way, has been supplemented effectively by the increasing availability of well-designed, durable, chemical engineering equipment. Effective coordination of research, invention, production, and finance has nowhere been better exemplified. Katural incentives and freedom under the American system of government have played a telling part in the development of the chemical industry as it has grown to industrial maturity since the days of the World War. It is now just a quarter century since those days when the politically ebullient conditions in Europe introduced an era of international distress. The conflagration which produced the greatest international war ever engaged in by civilized peoples had been preceded by a variety of commercial clashes. However, had the commercial units of the nations, rather than the political and military, been in the ascendancy at that time, the ensuing state of events would have been very different. Commercial intelligence services of the European governments had been functioning as effectively as the military services did later. In chemical fields this was particularly so. Developments in a consumer nation which had pot>entialities 570
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to create competition were met vigorously by the “dumping” of quantities of the same product made abroad. This practice was successful in causing a depression of the market and usually resulted in closing new infant industries by frightening off capital and creative ability. The United States, in fact all of the Americas, were consumer nations and to a large measure dependent upon foreign sources to augment their supply of chemicals and chemical products. I n this economic situation home products were not manufactured to an extent to give us independence of foreign sources. Even our native production was to a considerable extent carried on in equipment of foreign manufacture. Imported apparatus and machinery were in fact preferred, and suspicion existed with respect to much of the equipment made in America.
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