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FEDERAL RESERVE BANK OF RICHMOND

MONTHLY
REVIEW

The Fifth District, 1 9 6 7
Fifth D istrict G olf
Free Trade or Protection




THE FIFTH DISTRICT EC
A Review
For both the United States and the five-state area
comprising the Fifth Federal Reserve District, 1967
has gone on record as a year of considerably less
ebullience than either of its two immediate prede­
cessors. Over much of the year, the national economy
grappled with the problem of inflation, with consumer
prices rising at an average monthly rate of about
.2% , or faster than in either 1965 or 1966. This
acceleration in price increases began in a context of
slackened growth in aggregate demand as a major
inventory adjustment significantly dampened growth
in the first half. Largely as a result of the in­
ventory adjustment, considerable unused plant ca­
pacity emerged early in the year, and until late
autumn, the unemployment rate edged upward.
A s the inventory adjustment proceeded, real growth
in the economy slowed to a snail’s pace. But heavy
government outlays coupled with a smart recovery in
residential construction at least kept the business
advance alive in spite of the sharp turnaround in

C h art 1

inventory demand. The inventory adjustment was
largely over by July, and business activity in the
second half strengthened. Even this mid-year re­
covery, however, was not as great as many economists
and businessmen had anticipated. Large-scale work
stoppages in the fall of 1967 were responsible to some
degree for the slower than expected pace. M ore­
over, the uncertainty surrounding the tax surcharge
proposal in the latter months of the year apparently
kept many businessmen and consumers from for­
mulating expenditure plans clearly or from making
expenditures.
The Fifth District shared these problems with the
nation, but to a different degree. W hile no very
precise measures are possible it appears that the
economy of the Fifth District fared somewhat better
on average through 1967 than did the nation at large.
M ajor District industries, especially textiles and
furniture, were affected by the inventory adjust­
ments in the first half, but recovered by early fall.

SELECTED

FIFTH

DISTRICT

M

Per Cent of U. S. Total




I I Employment

Q

Payroll

Q Value Added by Manufact

DN
of
W ork stoppages associated with labor disputes in the
fall had less dampening effect in the District than
in the nation. It was generally true in 1967 that
changes of pace in economic activity in the Fifth Dis­
trict were less sharp and the consequences less severe
than for the nation as a whole. T o some extent, the
more even pattern of economic activity in the Fifth
District states is due to a different industrial mix
than in the whole of the United States.
District Manufacturing

Chart I gives a picture

of the relative importance of selected manufacturing
industries in the Fifth Federal Reserve District. The
eight industry groups represented are those for which
the Fifth District share of either employment, pay­
rolls, value added, or new capital expenditures com ­
prises more than 10% of the United States total for
that industry. Tobacco manufactures, textile mill
products, and furniture are the three industries most
closely associated with the Fifth District. The Dis­
JFACTU RING

I NDUSTRIES,

trict, for example, accounted for about 70% of the
value added in the tobacco industry in the 1963
census year. In textile mill products for the same
year, that fraction was 4 3% , and in furniture, 19%.
The other industries are shown for comparison. All
those shown are important in the Fifth District, and
certain industries, such as chemicals, have increased
in importance in the District economy since 1963.
Chart II shows the relationship of all Fifth Dis­
trict manufacturing to all manufacturing in the
United States in the 1963 census year. Value added
in the Fifth District comprised 7.7% of the United
States total. New capital expenditures in manufac­
turing in the District were 9.5% of the U. S. total;
total manufacturing payrolls were 7.2% ; and total
manufacturing employment was 9.0% .
Durable
goods production in the District, as a percentage of
the national total, remains relatively small. The
largest share of manufacturing activity in the District
is in the nondurable lines.

1963

Per Cent of U. S. Total

100

Paper and Allied Products

Furniture and Fixtures

Chemical and Allied Products

Stone, Clay and Glass Products

80

60

1

Jl
1 1t


| New Capital Expenditures
Source:


"

Census of Manufacturers.

■

f

.

it

r"

1
■
1

20

■

40

C h a r t II
ALL DISTRICT M A N U F A C T U R I N G

INDUSTRIES, 19 63

Per Cent of U. S. Total

Source:

Census of Manufacturers.

For those manufacturing industries important to
the Fifth District, 1967 was a relatively prosperous
year, despite the slowing of general economic activity.
In the textile industry, manufacturing man-hours re­
mained consistently under 1966 levels throughout
1967, by 3 to 5% on a month-to-month basis, and
textile output for 1967 showed about the same per­
formance. Prices of textile mill products did not
increase on balance throughout 1967, and the same
was true of 1966. Textile wages moved upward
slightly during the year. In the textile industry
there has been considerable discussion and a number
of hearings concerning the impact of imports on the
domestic industry. This was due in part to the fact
that 1967 was the year in which the Long-Term
Arrangement for trade in textiles, negotiated through
the General Agreement on Tariffs and Trade in 1962
had to be renegotiated. The Long-Term Arrangement
remained substantially unchanged as of year end.

industry in the District made a considerable recovery
after a slump early in the year.
Chart III compares District manufacturing em­
ployment in 1967 to previous years. The estimated
figure for 1967 indicates an increase of only .2%
over 1966, but 1966 posted a large gain of 5.8%
over 1965. The estimated number of persons em­
ployed in manufacturing in the District in 1967, as
an annual average, is 1,725,000, an increase of about
five thousand over the 1966 average. Chart IV gives
the picture for manufacturing man-hours in the Dis­
trict. Estimates indicate slight declines in manhours in both durables and nondurables. Total manhours declined from 1966 by an estimated 2.4% . In
the nondurable category this decline was 2.0% , and in
durables, the decline was 3.0% . These estimated
declines followed rather sizable increases in 1966, of
3.5% in the total, 2.5% in nondurables, and 5.2%
in durables.
The .2% increase in District manufacturing em­
ployment compares with a .6% estimated increase
for the nation in 1967. The District decline in manhours of 2.4% compares with an estimated national
decline of 1.3% for 1967.
Total Employment and Income Chart III indi­
cates that nonmanufacturing employment in the Dis­
trict in 1967 posted a more impressive gain than did
that in the manufacturing sector. Nonmanufactur­
ing employment, based on 1967 estimates, averaged
4.2 million, 71% of total nonagricultural employ­
C h a r t III

N O N A G R I C U L T U
F I F T hP

Millions

Concern over imports has intensified in recent weeks
due to the British devaluation, and the simultaneous
H ong K ong devaluation.
In cigarettes, that aspect of tobacco manufacturing
most concentrated in Fifth District states, production
as of October 1, 1967, was running ahead of 1966
by about 5% .

Tobacco manufacturing man-hours

have increased slightly on balance throughout the
year.

Furniture industry statistics likewise indicate

a substantially increased volume of business in the
latter part of 1967, and industry spokesmen are look­
ing forward to a prosperous new year.



The chemical
Note:

1961
1963
1965
1967 figures partially estimated.

Source:

State Departments of Labor.

1967

ment, and nearly 2 /2 times manufacturing employ­
x
ment. The estimated increase in the nonmanufactur­
ing sector was 3.2% in 1967, while the estimated in­
crease in total nonagricultural employment was 2.4% .
By comparison, the national total of nonagricultural
employment rose by an estimated 2.9% during 1967.
O f nonmanufacturing employment in the Fifth Dis­
trict, the largest increase during 1967 was in govern­
ment employment, an estimated gain of 5.6% . Esti­
mated average government employment in the Dis­
trict was 1.26 million in 1967, an increase of about
67,000 over 1966. The District gain compares to
a nationwide increase in government employment in
1967 of an estimated 651,000, or 6.0% .
The services area has also accounted for large em­
ployment gains during the past year. In the Fifth
District, this increase is estimated at 3.9% , or about
30,000. Nationally, the estimated 1967 increase was
5.1% , or about 490,000. Estimates for the District
also show increases in employment of 2.4% in trans­
portation and public utilities, and 3.8% in finance
and insurance in 1967.
Table 1 presents estimated personal income
statistics for the Fifth District states for 1967 and
percentage changes from the previous year. Esti­
mates for 1967 are second quarter figures at sea­
sonally adjusted annual rates. O f interest in Table 1
is the comparison of the Fifth District with the
United States. District states grew relatively more
in terms of both total and per capita personal income

L

C h a r t IV

FACTORY M A N - H O U R S
FIFTH DISTRICT

Mil . Per Week

70

60

50

40

30

20

0
1961
1963
1965
Note:
1967 figures partially estimated.
Source: State Departments of Labor.

1967

during the year than the nation. Per capita per­
sonal income in the District, however, remains below
the national average in all states except Maryland
and the District of Columbia. Some of the explana­
tion for the relatively high rates of growth in both
total and per capita income in Maryland, D. C., and

E M P L O Y M E N T
Table 1

RI C T

FIFTH DISTRICT PERSONAL IN C O M E -1967*
Total

Millions
Amount
1.50

($ Billions)
D.

C.

(Dollars)

%

3,390

5.8
5.5

4.6

2,290

5.2

4.1

2,345

3.0

4.3

2,128

3.7

49.8

6.0

2,698

4.8

613.3

*Estimated

6.5

2,748

5.5

U. S.

4,203

7.0

11.8

5th District

6.9

4.1

S. C.

Source:

%
7.9

3.4

W. V a .f
N. C.

.75

Change
66-67

12.5

Va.

J.00

Amount

12.5

Md.
1.25

Per Capita
Change
66-67

5.7

3,099

4.6

f Includes entire state.

U. S. Department of Commerce.

Virginia is the influence of the boom-type expansion
of the nation’s capital.

.50

Retail Trade There is som e evidence that retail
trade on a nationwide basis was somewhat under
that which businessmen expected in 1967, par-

.25

0

( Continued on page 8)

1961

1963




1965

1967

5







THE FIFTH DISTRICT ECONOMY IN FOCUS

C h a r t VI

C O N S T R U C T IO N

Thousands

1957-1959=100

(Continued from page 5)

ticularly during fall and winter months.
This
probably can be attributed in part to consumer un­
certainty about future tax increases. Fifth District
retail trade held up relatively better than in the
nation. Chart V presents a comparison of estimated
1967 retail sales and trade employment with earlier
years. Retail sales for the year were under the
1966 figure by an estimated .9% . Estimated trade
employment for 1967, on the other hand, increased
by 1.6% over the previous year.

Construction Employment
(Thousands)

Index of Residential Contracts
( 1957-1959 = 100)

Construction W h ile the index of value o f co n ­
struction contracts issued in the Fifth District in
1967 ran consistently above the nation at large, it
failed to regain the peak it reached in July, 1966.
In late 1967, beginning approximately in October, a
further tapering off was evident in the District index.
This was probably attributable to rapidly rising in­
terest rates, rising building costs, and uncertainty
over the future course of economic policy.

Index of Total
Construction
( 1957-1959 = 100)

Chart V I

plots the progress of the construction industry.

On

Note:

1961
1963
1965
1967 figures partially estimated.

Source:

1967

The Dodge Co. and State Departments of Labor.

an estimated basis, the 1967 gain in total construc­
tion contracts was about 1.6% over 1966.

In resi­

dential construction, there was an estimated decline
of 4.0% from 1966, and a decline of about 20.0%

C h art V

FIFTH DISTRICT TRADE

$ Billion

Thousands

from the 1965 peak. Industrial contracts were off
in the District in 1967 also, and it was other com ­
mercial contracts which filled the gap to produce the
slight gain in the total. Estimated construction em­
ployment declined by a very slight .5% during 1967.
Banking Chart V I I indicates the progress o f
banking in the Fifth District in 1967, in relation to
earlier years of the sixties. On an estimated basis
for the year, time deposits in District banks made
the most spectacular gain of four series plotted. Time
deposits increased 15.5% during the year, as com ­
pared to a 2.5% increase in demand deposits.

The

estimated increase in average time deposits was $862
million, compared to an increase of an estimated
$192 million in demand deposits for Fifth District
banks.

Investments increased during 1967 by an

estimated $462 million, or 11.7%, while gross loans
increased an estimated $551 million, or 6.5% .
Developments in banking roughly paralleled the
national pattern.

The slower growth of loans was

due in part to weaker loan demand associated with
the slower pace of economic activity, to much slower
inventory accumulation and to repayment of bank
loans out of the proceeds of record corporate bond
sales.

A t the same time banks have added heavily

to investments, putting to work the reserves which
1961

1963

1965

1967

“Based
 on firms operating 1-10 establishments.
Note: 1967 figures partially estimated.
http://fraser.stlouisfed.org/
Source: Bureau of the Census and the State DepartFederal Reserve Bank of St. Louis

have been injected in record amounts by Federal
Open Market operations.
State Finance T a x revenues grew substantially
in all Fifth District states in 1967. Table 2 shows
this information on a total and per capita basis. Of
interest again is the comparison in Table 2 of the
Table 2

FIFTH DISTRICT* —1967

STATE TAX REVENUES
Fifth District States
Total
1967*

1966

($ millions)

Per Capita
Change

Md.

641

588

Va.

635

529

20.0

W. V a .f
N. C.

282

264

841

777

1967*

1966

(doillars)

%
9.1

Changi

174

163

%
6.9

140
157

118

18.3

6.6

146

7.3

8.2

167

156

7.0

396

U. S.

359

10.2

152

139

9.5

2,795

2,517

11.0

158

144

9.8

31,910

S. C.
5th District

29,388

8.6

162

151

7.5

*Estimated f l^ u ^ e s entire state.
Source: U. S. Department of Commerce.

District with all states of the nation. Increases in
the Fifth District were somewhat larger in total and
per capita. Virginia experienced the largest increase
in total and per capita of the five states, followed by
South Carolina. Per capita tax revenue is higher
than that throughout the nation in both Maryland
and North Carolina, for both years shown.

C h a r t V II

B A N K I N G TRENDS
FIFTH DISTRICT MEMBER BANKS

$ Billion

10

0

C h a r t VIII
DISTRIBUTION OF STATE T A X REVENUES BY TYPE

‘ Excludes D. C. and includes all of West Virginia.
Source: U. S. Department of Commerce.

The estimated District population increase in 1967
was about 200,000, or 1.1%. By states, the estimated
per cent increases in 1967 w ere: Maryland, 2 .0 % ;
D. C., .4 % ; Virginia, 1 .5 % ; North Carolina, 1 .1% ;
South Carolina, .6% . W est Virginia, on the other
hand, declined in population by an estimated .6% ,
or about 11,000 people. Thus, both state tax revenues
and income (Table 1) increased at faster rates than
did the population throughout the District.
Chart V III shows the sources of state tax revenues
in percentage terms by type for the Fifth District as
a whole in 1967.
Agriculture
T o b a cco farmers in the D istrict
brought in higher yields, but experienced lower prices
and a lower-than-expected quality during the 1967
marketing season. Gross returns increased over the
previous year, but a shift in demand on the part of
buying firms from previously preferred mid-stalk
leaves to lower-stalk varieties, as well as the quality
problem, were largely responsible for the price de­
cline. The result is that the percentage of the crop
placed under government loan increased significantly.
The year’s cotton crop in the District and in the
nation set record lows. The 1967 crop was the
smallest for the District states on record, due to
damp and cold weather during growing season and
high bug infestation. Nationally, cotton produced
was the lowest since 1895. A large increase in
cotton prices has resulted, and serious concern
has developed among textile producers about pos­
sible shortages in the supply of cotton during
the coming year.
William H . Wallace

1961

1963

1965

Note: 1967 figures partially estimated.



FREE

TRADE

OR

PROTECTION

An Ol d Controversy Renewed

The Kennedy Round negotiations have once again
focused attention on various problems concerning
international trade. According to many economists,
a free flow of goods and services over the world
is in the interest of all countries. Yet arguments to
justify protection have always been readily found,
and today both tariff and non-tariff barriers to trade
are widely used as a matter of policy. In an effort
to reduce such barriers, delegations from some 50
countries have met in Geneva during the past four
years to discuss such problems as the lowering of
duties, the widening of quotas, and the use of
“ escape clauses” in trade agreements.
This article reviews briefly some of the theoretical
aspects of the controversy between free-traders and
protectionists and considers certain features of some
of the trade barriers currently employed by the
trading nations of the world.
The “ Classical” Theory of Free Trade One of
the most persuasive advocates of free trade was “ the
father of economics,” Adam Smith. Published in
1776, Wealth of Nations eloquently sets forth why
and when countries will benefit from international
trade. Although other economists of the so-called
“ Classical School” later elaborated his theories,
Smith’s ideas have had a lasting influence on
economic thought.
“ It is the maxim of every prudent master of a
family, never to attempt to make at home, what it
will cost him more to make than to buy,” said Smith.
“ The tailor does not attempt to make his own shoes,
but buys them of the shoemaker. . . . ”
“ What is prudence in the conduct of every private
family, can scarce be folly in that of a great kingdom.
If a foreign country can supply us with a commodity
cheaper than we ourselves can make it, better buy it

10


of them with some part of the produce of our own
industry employed in a way in which we have some
advantage.”
Smith believed firmly in the benefits to be gained
from an international division of labor. Like persons,
countries should specialize in the production o f those
goods which they could produce most efficiently. An
individual nation’s relative advantage over other
nations could be based on the relative abundance of
a certain factor of production in the country, on
peculiarities of climate, on some unique characteristic
of its population, or on any of a variety of other
factors.
W orld-wide specialization would be significant,
according to Smith, only if the resulting products
could be exchanged freely against each other. As
he saw it, prolonged state intervention in interna­
tional trade would be harmful except in two specific
cases. First, he recognized that it might be ex­
pedient to protect an industry that is of vital im­
portance for the national security. Second, he agreed
to a tariff on imported products if the same goods
made inside the country are exposed to excises.
Temporary duties could be levied as an instrument
of retaliation.
These ideas clashed with the mercantilistic maxims
that had prevailed in varying degrees of sophistication
for some time. The supporters of mercantilism in its
cruder forms held that a country’s wealth depended
predominantly on its stock of precious metals. A
nation possessing no gold and silver mines could en­
large its riches only through the creation of a balance
of trade surplus, as this would result in an inflow of
precious metals. T o attain such a positive position,
a policy of restriction of imports and stimulation of
exports was advocated.
The basis of mercantilism had been attacked in

England as early as 1752 when David Hume showed
the futility of building up stocks of gold and silver
as an end in itself. Smith now demonstrated that
nations would in fact benefit from unhampered in­
ternational trade. He reasoned that whenever two
countries, A and B could produce two products, X
and Y , and A had an advantage in the production of
X , whereas B could produce Y at a lower cost, it
would be in both parties’ interest to establish trade
connections. This is the basis of the free trade
doctrine; later authors like David Ricardo and John
Stuart Mill refined and extended it considerably.

difficult to judge in advance whether an infant in­
dustry should be eligible for support in terms of
long-run benefits. They were also concerned that
protective devices, though meant to be temporary,
might become permanent.
Most other arguments in favor of protection have
received little support from economists. Many are
applicable only in special circumstances. It is, for
instance, frequently heard that countries should pro­
tect themselves against imports from nations where
labor is relatively cheap, on grounds that these im­
ports might jeopardize the high level of wages and
employment in the importing country. It frequently
has been pointed out that this argument confuses
wage rates and unit labor costs. Because of superior
training, health, and capital equipment, unit labor
costs in “ high-wage” countries may actually be equal
to or lower than unit labor costs in “ low-wage”
countries. In such a case, there would be little
danger that low-wage countries could capture the
markets of high-wage countries.
Any protectionist policy has the drawback that it
may provoke retaliation. Experience suggests that
when one country starts imposing duties upon im­
ports, others will soon follow. This tends to shrink
the volume of multilateral trade, thus detracting from
the world-wide division of labor.

Arguments in Favor of Protection
O ne of the
earliest attacks 011 Smith’s free trade doctrine came
in Alexander Hamilton’s “ Report 011 Manufactures.”
This document, drafted in 1791, contained a survey
of the contemporary situation of U. S. industries and
urged a protectionist policy to stimulate industrial
growth.
Hamilton first explained why establishment of in­
dustries in the young, still predominantly agricultural,
republic was desirable. He pointed out that reasons
of military security and of national development
spoke strongly for it. The mere fact that an industry
did not exist in a country, he said, did not imply
that it was obviously not advantageous to establish
it. It could well be that a private entrepreneur
might hesitate to enter upon production, as full ex­
posure to competition of imported products during
the industry’s infancy could result in heavy initial
losses. In those cases where it would be in the in­
terest of the country if the particular industry were
to be established, but where private initiative alone
would not bring it forth, temporary governmental
protection could prove beneficial. On its maturity,
according to this argument, the new industry could
then safely be exposed to foreign competition. In
short, Hamilton advocated a government-directed
commercial policy aimed at promoting industrializa­
tion, as opposed to a “ laissez-faire” policy. H e felt
that import duties, export premiums, bounties, and
other forms of government intervention could be em­
ployed judiciously to achieve this end.
The so-called “ infant industry” argument for pro­
tection reflects the diverging interests of countries
with unequal levels of development. In the United
States of Hamilton’s day, newly established industries

Instruments of Protection Generally students of
foreign trade make a distinction between tariff and
non-tariff barriers. The former group consists of
import and export duties, the latter of quantitative
restrictions, embargoes and various kinds of ad­
ministrative protection.
Export duties, which are used by many countries,
are unconstitutional in the U. S., but import duties
are used here as well as abroad. Import duties can
be levied in several ways and for various purposes.
A d valorem duties for instance, are expressed as a
percentage of the value of the imported goods,
whereas specific duties consist of a fixed fee per
physical unit of imports. Since this last method does
not consider price differences of goods within the
same category, it in fact lays a heavier burden upon
products with lower unit prices, and its effectiveness
is reduced when prices rise. W hen applying ad
valorem duties, the question arises how to determine
the value of the imported good. Should duties be

had to compete with experienced European firms.

based on the value of the good in the country of

If left without help, many would likely have died a

origin or on values in the receiving country ? Should

premature death.

the value be measured by wholesale or retail prices?

W hile admitting the general plausibility of this
argument, free trade advocates immediately indicated
its weak points.

They pointed out that it is very




Should f.o.b. quotations or c.i.f. prices be decisive?
The U. S. Bureau of Customs uses various methods
of valuation.

The dutiable value is generally based

11

on the “ foreign value” and less frequently on the
“ export value.” There are, however, exceptions to
this practice. In some instances, dutiable value is
based on the wholesale price in the United States
of the competitive domestic product. In other cases,
dutiable value is based on the wholesale price in the
United States of the imported product, less most of
the expenses incurred in bringing the product to this
country and marketing it.
Tariffs can also be used as an instrument of com ­
mercial discrimination. Sometimes the same duty
applies to all nations; often, however, some countries
get preferential treatment. The British Common­
wealth members, for instance, have for over thirty
years granted lower duties to each other than to out­
side countries. Generally, the United States follows
the “ Most Favored Nation” principle and concedes
to all trading parties, with certain specified excep­
tions, any favorable treatment accorded to any other
trading partner.
Import duties are frequently referred to either as
“ protective tariffs” or as “ revenue tariffs.” The
distinction between protective and revenue tariffs
refers to the purpose of the duty. Generally, though
not always, both elements are present. If the duty
is so high that it becomes in fact prohibitive, pro­
tectionist motives are clear. If on the other hand
a tariff is not so high as to exclude an import, and
is levied on goods that the country itself does not
produce, revenue purposes are usually paramount.
Quantitative Restrictions B etween the simple
tariff and a quantitative restriction stands the tariff
quota which combines features of both. It is a
regulation by which a limited quantity of a certain
product can be imported at a special low duty. A ny
additional amount, however, is subject to a higher
duty. Quotas of this kind are generally used when
domestic output of the good is low, either for seasonal
or other reasons. This system may have troublesome
side effects, however. Unless provisions to the con­
trary are made, every time a new tariff quota period
is opened, a large influx will occur until the quota
has been reached. This practice may disturb the
national market, causing prices to fall, to the dis­
advantage of both local companies and importers.
Similar objections can be made to the use of the
“ global fixed quota.” In this case, an absolute limit
is set to the quantity of a good that can be imported

that they tend to make trade relations rigid, as they
do not allow new suppliers to enter. A major at­
traction of this method to some countries lies in the
fact that allocation of quotas will prove a powerfulbargaining weapon in trade discussions. They can­
not, however, be employed as such by countries which
adhere to the Most Fa-yo'red Nation principle.
The extreme of quantitative restrictions is, of v
course, the embargo. Many countries prohibit the
export of such goods as strategic minerals. Import
embargoes often exist for drugs and for books or
films that might be deemed a threat to health
or morals.
“Administrative” Protection Since trade barriers
are gradually being reduced as a result of interna­
tional cooperation, more attention is nowadays given
to “ administrative” protectionist methods. Many of
these hamper trade by creating an atmosphere of un­
certainty as to what treatment the importer can
expect for his products. Tariff classification forms
a good example. Since custom laws usually are
very complex, importers may be in doubt as to which
category and which tariff applies to their goods.
Importation may also be discouraged by meticulous
prescriptions for indicating the country of origin of a
good, and by unnecessary delay at customs clearance.
“ Escape clauses” in trade agreements form another
powerful weapon in a protectionist policy. They
enable a country to withdraw all concessions made,
if increased imports resulting from the concessions
cause or threaten a serious injury to a domestic in­
dustry. During the examination upon complaint
thereof, the goods cannot be cleared from customs,
thus causing

delay,

uncertainty

and

loss.

Tariffs Versus Quantitative Restrictions

Both

instruments have their advantages and their disad­
vantages. Quotas, for instance, by fixing the quantity
that can be imported, give much more certainty about
protection than do duties.

Moreover as employed

in some countries they can be made more flexible
than tariffs, as they may require less legislative pro­
cedure at installation, renewal, or change.

On the

other hand, some types of quotas have the disad­
vantage that they may make entry of new sup­
pliers into the market impossible.

Both tariffs and

quantitative restrictions tend to cause prices in the

A variant of this is the so-called

importing country to be higher than they otherwise

“ allocated quota,” under which allocations may be

would be, but quotas usually have a greater impact

based on the percentage share that a foreign supplier

on the working of the price mechanism since the

holds in total imports during a certain “ base” year.

quantity of imports cannot always adapt freely.

during a period.

Some observers object to allocated quotas on grounds

12


Jan H . W . Beunderman


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102