The lmpact of the Common Market on fhe U. S. Economy

An oddress by Secretary ol Commerce Lvther H.

Hodges

Gteensleye-,fi]lantg,, Georgia,

fo fhe 29th snnuol ol the Federal Home Losn Eonk oJ

Tiere has grown up around the banking profession a public imabe of the banker as a prudent but very"con- servative felbw. This, I think, ij justi_ fied-and happily so. We all 'take comfort from the knowledge that the banke.rs- handling our money are responsible and cautious.

_

But there is another side to bankins. and that is its role in buildins a dinamic economy. It is to this iopic 6f gror,r,'th that I would like to address myself.

The United States needs to accelerate its economic growth if it is to sustain prosperity, attain full employ- ment and restore equilibrium to iis iir_ ternational accounts.

To this end, the Administration has taken steps.to encourage investment in capltal equlpment through revision of depreciation schedules f6r machinerv. and has proposed tax credits for iii vestment in new equipment.

Technical and finLncial aid has been made available to areas of long-term unemployment. A Federal retriinine program has been started for workerl displaced by automation or structural changes in the economy. public works fun{s -have been proposed for areas hard-hit by unemployment.

Actions su,ch as these have heloed. and will continue to help, our."ono-r, grow stronger. Gross nitional produci in the first quarter of this year stood at a record annual rate of $5+9 biltion; fourth quarter corporate profits before taxes were the highest ever at an an_ nual rate of 52.4 -billion; personal income, retail sales and the industrial production index in March were all at record highs.

Set Goals High

But these figures, imprissive as they are, are below our targets. We can and must do more if we are to realize our potential as a nation, if we are to bring unemployment down to a tolerabl-e level and generate and maintain for all of our people the standard of living that only some enioy todav.

In this sense, we would be-foolish. indeed, if we were to follow old preju- dices-to see our econo,my oniv'in domestic terms, and ignorl the tremendous opportunities -offered us by international trade. Overseas markets can provide a boost to our economy that we ,cannot overlook.

As the result o,f two world wars. we have come to realize that we are polit- ical neighbors with the rest of the world. We have reached the point today where we must face up to 6eine neighbors economically as w-ell.

This poses problems in that it puts every country in competition with us; it poses opportunities in that it makes every nation our market. fn at least one ins'tance-that of the Common I\{arket-it offers us a lesson in how ]ve ca,n respond with profit to this enlarged world of international trade.

The six countries of the European Economic Community faced the same problem that we do todav-how to derive the most benefit from foreisn trade with the least damage to domeltic industries.

. They are not only solving that prob- lem,-but racking up tremendous economic growth., and forging ahead to Decome one ot our strongest competi- tors.

Common Market Meaning

Therefor.e, I would like to address myself_ today principally to t&e Common Market, how if hai accomplished what it has, and what it means- to the economy of the United States.

In the late 1940s the countries of Europe were faced with the task of rebuilding their economies on the ruins of World War II. They had to decide whether to r,eturn to thl aggres- sive nationalism that had marked-Iheir previous histories and the disastrous conse-quences that had always fol_ lowed, or follow a path of cooperation and mutual helo.

With the financial aid of the United States through the Marshall plan and its offshoot, the Orsanization for European Economic Cooperation. Eurooe started on the road -to r.co.rerrr. tn 1950 the European Coal and -Steel Community was formed, and the big step toward Euratom-the Europeai Energy Commission-and the eommon l\4arket was taken.

Belgium, Luxembourg, The Netherlands, France, Italy, and Germanv faced difficulties thai five years beforl rvould have been called insurmountable. There were ancient political animosities-especially between France and Germ'any. There were economic rivalries that had existed for centuries. There were the well established tarifi walls, quotas, discriminatory freight rates, customs, and passport barriers that were seemingly totally ingrained in each country's national fiber.

France was- fearful that its high overtime pay schedules and policy of equal wages for women would be threatened by lower pay scales of the other countries. f wonder if any of these traditional fears sound famiiiar to you ? Thev do to me,,because they are precisely the type of arguments -I've h'eard here in the United States against the President's trade bill, whiih is designed to open world markets to us. But I'm happy to report that we hear less of this now than some months ago.

-ftaly, which was trying to catch up with the others in industrializatiory feared its efforts would be jeopardlzed by the superior machine! of the \rermanS.

West Germany supported a high- cost agricultural establishment and was fearful of low-cost French and Dutch produce.

The Benelux nations wanted raw materials and semi-finished manufactures at low world market prices.

The Europeans set up mJchinerv with which ihey hoped 'to deal witir these problems, ind ri'hich they needed t9 g"t the necessary support for the Common Market.

_ Bgt a strange thing happened- hardly any of the terriblJconsiquences that were anticipated by some-as the result of this new free irade have yet to develop. Instead. what did deveiop was a business boom of a\,l'esome pro- portions.

A feu'figures at this point will show you the extent to which Western Europe's economv has prosp,ered under the spur of increasingly liberal trade.

-The average gross national product of the Common Market in the period l95B through 1961 increased at a rate of 5.7 percent a year. The average an- nual rate of increase for industrial products for this period was 8.9 percent.

By comparison, the gross national product, in constant dollars, of the United States for the same period grew at an annual rate of less than 3 percent.

Trade Doubles

Trade within the Common Market which was 6.9 billion in 1958. had nearly doubled to g11.9 billion in.1961. Both exports and imports grew from around $16 billion to more than $20 billion.

During this period the ECC countries removed all quota restrictions o.n industrial goods moving within the market, eight years ahead of schedule.

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Customs duties on industrial Eoods have already been reduced 40 peircent and are scheduled to drop ano?her 10 percent on July l, two and a half years ahead of schedule. There are -difficulties posed by agricultural products. but duties have alieady been reduced by 30 to 35 percent and are expected to be cut further by the middle bt ttre year.

Dr. Walter Hallstein, pres,ident of the EEC Commission pointed out the moral very well when h-e said in Wash- ington last month, "th,e Common lVlarket tech-nique of progressively reducing tariffs has provedto be an ex- cltlng new economic catalyst. It is revoking decisions to become competi- tive, to expand and to moderni2edecisions that otherwise might not have been taken."

\&'e can be proud of the role we have played in assisting and encouraedns the development oflhis great econdmii power of the Common-Market. Now that it has acquired stature, the countries of the free world must deal with the next challenge, which is that of a close and practical economic relationship.

Free Flow Important

For just as the free flow of goods was important to the growth of Western Europe economy, so it is important to the strength of the Free World.

Trade policies are determined gen- erally by economic considerations,"but political factors must b,e considered on many occasions,

For instance, in the IJ.S. we must finance our military and aid commitments-so vital to the defense of the free world-from our export surplus.

Last.year our export surp'lus .*..Ld.d .$5 billion. but more than $Z billion of this was financed from aid funds. leaving a balance of about $3 billion. This \\'as not enough to cover our overseas commitments and the flow of shortterm capital,_ so that for the year we ran nearly $2.5 billion short in our international accounts.

While this was a marked improve- ment over the deficit of $3.9 billion we ran in 1960, it, nevertheless. cost us a sizable amount of gold. And big as our golcl reserves are, they are not inex_ haustible. We cannot protect the dolIar indefinitely by drawing upon them. The only real safeguard iJto'bring our lnternatronal accounts into a oosition u,-here averag'e-equilibrium will'be pos- sible. As bankeis you would agree q'ith this, f am sure.

One way to do this would be to reduce our military and aid assistance to our friends and allies. But this. inevitably, would divide and sap the strensth of the free world's opposition to ihe Communist offensive. - Another way would be to limit imports-but this would only invite similar action from other nations and cut us ofi from manv profitable markets. It could also limit sev.erely the imports of strategic matenals, and many materials essential to the full functioning of our domestic industrv.

In terms of remedies strong enouEh to cure, the chief solution tJour bilance of pa5rments problem lies in an accelerating export program.

Goal Set

The National Export Expansion Council, which is working with the Department of Commerce -to increase overs€as sales has set a goal of a $2 billion increase in exports-of the next 12 months. Had we such an increase last year, our larger trade surDlus would have absorbed most of our pay- ments deficit.

Now where can we look for expanded markets for American products? Except for the Sino-Soviet-bloc, you can swfep the globe, but certainly no_ market has a greater potential than Western Europe.

_ Of qur total exports in 1960, more than 25 percent-more than $5 billion -we.nt to present and prospective members of the Common Markit. Our imports from these countries totalled 3l billion.

Thus we earned about gll billion from these, or abo.ut half ihi-amount of our dollar earnings on our trade surplus. But think of the possibilities for expansion in these couitries !

fncome Rising

. European incomes are rising-creat- lng an enormous potential demand for all rypes of goods. The people of the Common Market have only-23 radios for every 100 persons. We have 95 oer 100. The Common Market has six'refrigerators for every 100 persons. We have 28. They have six washing machines per 100. We have 27.

We excel in the production of consumer durables, and we can share in the growth of this market through exports. We can also produce the iquiD- ment for the manufacture of tieie goods in Europe.

Here then is a wonderful opportu- nity for expansion. Here is j prime area where an acceleration of our marketing efforts would go far toward alleviating the pressures of our balance of payments deficit.

But it would do much more than that. As I pointed out earlier, increased foreign trade would go far toward. imparting added vigor io our oomestrc economv.

The Bureau of Lbor Statistics estimates that 3.1 million iobs were required in exporting g20'billion worth of merchandise in 1960. Our Southeast shared in this. In the seven states in w'hich your bank operates-Alabama, Florida, Georgia, Maryland, North and South Carolin-a, and Virginia, plus the District of Columbia-the value of goo{s- ma_nufactured for export exceeded 91.5 billion in 1!b0. Thit was l0 percent of the country's total exports of manufactured products for that year. Plants engaged in manufacturing for export in this area employed more than 380,000 workers.

And the Southeast shared, and shared handsomely in agricultural exports.

In the fiscal year that ended last June the U.S. shipped overseas a rec- ord $4.9 billion of farm products, which were roughly one-quarter of all our exports, not counting Defense Department shipments.

Your area's proportion o,f farm prod- ucts for exports has been estimated by the Department of Agriculture at nearly $652 million, or 13 percent of the total. '

Agriculture Subsidized

I would like to point out, however, that of our $5 billion farm exports. about g1.5 billion went abroad irndei special government programs, notably Food for Peace. And another $1.3 bil- lion was subsidized bv the Government, through export payments or through loans or sales to private exporters at below market prices. All told, about 60 percent of our agricul- tural exports in 19ffi-61 was subsidized in one way o,r another.

But more than 50 percent of our hard cash agricultural sales-92 billion worth of farm productswent to countries that are Common Market members or potential members. More than $l.l billion lvent to the current Six, and by comparison, these countries shipped less than one-fifth of this amount in agricultural products to the U.S.

All of this was accomplished under outmoded trade legislation and without a concerted effort in the export field. Think of the opportunitieJ that lie ahead ! We can seize these opportunities, however, only if we can negotiate reasonable tariff arrangemen[s. As the Common Market's iniernal trade walls crumble, a common external tariff wall is being built This zero internal tariff puts our manufacturers at a great disadvantage.

Let me give you a couple of hard illustrationJ of iust whai it would mean:

Before the Common Market was established, American, French and ltalian cars of comparable size could be exported to Germany on an equal basis -paying.' a duty of 2l per cent. Today, the tariff on French and Italian cais exported to Germany-the internal Common Market tarifi-is 12.5 percent. The exiernal tariff on American cars is now 23.2 percent. As a result of our negotirations in Geneva, this is due to drop to 22 percent. The Common Market internal tariff, however, will eventually shrink to zero.

(Continued, on Poge 24)