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November-December 1962 ON!· LY REVIEW KANS . The Changing Shape of World Trade . . . . . page American Agriculture and the European Common Market page 10 Current Statistics page 16 . . . . . 3 FEDERAL RESERVE BANK OF KANSAS EITY S11hscriptio11s to th e IvJo TllLY R1-:vrnw ar available t o the public 1citl10ut charge. Additional copies of anu issue may be obtained from the Resea rch Department, Federal Reserve Bank of Kansas City, Kansas City 6, Missouri. Permission is granted to reproduce any material in this publication. THE CHANGING SHAPE OF WORLD TRADE T he passage of the Trade Expansion Act of 1962 has been hailed as a historic step forward in promoting the liberalization of international trade. Th re is littl d ubt that the new tra<l bill doc rcpr s nt a signilkant departure from the past in term of th wide latitude it confer upon the x utivc branch f th Government to deal with the initi ation and/ or modification of international agreements. It i exceedingly important to note as well, that its passage was, in no small measure, a response to a metamorphosis in the world trade structure. It is in connection with these developmental changes in world trade over the past few decades that the primary attention of thi s article is focused. THE BACKGROUND Within recent year , a new dimension ha be n added to the tructure of world trade. Thi phenom enon- described as economic regionalism- is manifested by the development of di tinctly regional economic trading blocs. A consequence of this is the increased emphasis which has been focused upon the bloc as the vehicle through which the trading policies of the individual countries are harmonized. This new dimension has been superimposed upon the clas ic pattern of multilateral trade betwc n individual nation as envisaged by the Reciprocal Trade Agreements Act of 1934, and th e 194 7 General Agreem nt on Tariffs and Trade. Table 1 idcntifie the major regional tradin g entities in order of their e tablishment and compares their re pective areas and popuMonthly Review • November-December 1962 lation with those of the United States so that some idea may be grasped as to their relative magnitudes. The best kn wn tradin g blo is th e uropcan : onomi ommunity, kn ow n as th e Europ an Common Markel. 'I he rapid 1 rowth a nd apparent , ucc s · f th ' Common Mark t has had a prof und cfTect on the re structuring of foreign trade relationships and ha resulted in the pawning of a number of other regional groupings, such as the European Free Trade Association and the Latin American Free Trade Association. In addition, the Eastern European Council for Mutual Economic Assistance, or Comecon as it is commonly known, is the Communi t regional counterpart designed to promote economic coop ration among Soviet ate llitcs. Thu , the idea of regional trading Table 1 MAJOR ECONOMIC TRADING UNITS 1959 Population (In Millions) European Economic Community* European Free Trade Association** Latin American Free Trade Associationt Total United Statestt Area (Thousands of Sq. Miles) 167.5 457.7 89.0 493.1 158.3 414.8 179.2 10,374.6 11,325.4 3,615.2 * Includes Belgium , France, Italy , Luxembourg , the Netherlands , and West Germany ; exclude s European and overseas associated co untr ies and territories . ** In cludes Au stria , Britain , Denmark, Norway , Portugal , Sweden, and Switzerland. tlncludes Argentina , Brazil , Ch i le , Colombia , Ecuador, Mexico , Paraguay , Peru , and Uruguay . tt lncludes Alaska and Hawaii. SOURCE : European Economic Community , European Free Trade Assoc iat ion, and U. S. figures are from Benoit 's Europe at Sixes and Sevens ; Latin American Free Trade Association f igures are from U. N. Statistical Yearbook, 1960. 3 The Changing Shape groups is peculiar neither to the Free World nor to Europe alone. However, while the Latin American Free Trade Association is a unique cooperative venture for that area, the apparently recent growth of regionali m in urope may be traced back to the period shortly after the clo e of World War 11. Probably the arlic t tep in th e direction of economic cooperation occurr d in 1921 when a cu toms union was formed between Belgium and Luxembourg. The groundwork for eventual E uropean economic integration wa laid in mid- 1947 with the United tat , offer o f Marsha11 Plan aid to l"'. uropc conditiona l upon the undertakin g o f a cooperative fTort o n th part of the ◄ uro pcan coun tries to es tabli sh an effcctiv re ovcry program. In July 194 7, I 6 countries of W stern E urope e tabli shcd a ommittec for European ooperation, resulting in the establi hment of the Orga nization for European Economic Cooperation (OEEC) on April 16, 1948. 1 Earlier in that year an event took place which wa to portend the shape of thin gs to come in Europe. This was the expansion of the Belgium-Luxembourg customs union to include the Netherlands in the formation r Benelux. wa. in r Since the r rmation f O spon c to prop d U. . aid in th e r construction of the West urop an conomy, one of the immediate co ncerns of that organization was the fo rmul ation of plans which would enable participating countries to utili ze uch aid and assistance effectively. In addition to this, attention was directed by that body to such problems as combating the "dollar shortage" existing at that time, promoting increa ed intra-European and external trade through the lt originally included Au tria, Bel giu m , Denmark, ire . France, reece, lceland , Ital y, Luxembourg, the etherlands. Norway, Portugal, weden, witzerland , Turkey. and the nited Kin gdo m . We t Germany wa added shortly thereafter a nd in Jul y of 1959, Spain became a full member. 1 4 liberali zation or elimination of quantitative rctri ctions, achieving method for increasing productivity of Europea n industry, and additionally, formulating procedure for th e eventual economic unification of We tern E urope. Althou gh it wa th e hope of th e O E to create a free trade area whi ch would encompa ss th e whole of West rn uropc, thi wa not to be realized. While the O E did achieve some degree of uccess in eliminating quantitativ restrictions on trade, it proved to be ineffective in combating tariff . For this and other rea o ns, ome countrie the refore fcit that a m re far-reachin g a pproach to integration was nc dcd . Th first step in April 195 I , was th e signin g of a treaty establishing th ' E ur p an oa t and Steel mmunity ( CS ) . Known as th chum an Pl an, it became ope rational in August 1952. lts membe rs included West Germany, France, Italy, and the Benelux group . The effect of the plan was to establish a common market in coal, iron, and associated products which was totally free of all impediments to free movement of such products within the market area. It wa from the initi al success of this cooperative venture that the more ambitious cheme for a n expanded comm n market a rrange ment stemmed. By 1955, the advantag of the European Coal and Steel ommunity were evident to its members, and accordingly, they gave serio us consideration to forming a larger customs union along th e lines of the ECSC. This decision by the six ECSC members to go it alone prompted an investigation within the OEEC of the possibilities of a multilateral association with the proposed common mark t and the regroup. Their findings mainder of th e O indicated that uch a relation hip with the Six wo uld be technically po siblc and economically advantageou . Negotiation among the Six culmin ated in the acceptance of th a rticle of the Trea ty of Rome on March 25, 1957, and le s than a y ar later , on January 1, 195 8, of World Trade the European Economic Community (EEC) came into being. In response, some OEEC countries actively pursued the establishment of a free trade area which, under the original plan, would have comprised all OE C countries including those of the Common Market. By the latter part of 195 8, negotiations along these lines had ended in disappointment. The implementation of the Treaty of Rome began on January 1, J 959, with the first tariff reductions within the European Economic Community. Within several months, at the invitation of Sweden , six other nations-Austria , D nmark , witze rland , Portuga l, Norway, and th United Kingdom- met to furth e r the stablishm ·nt of a free tr~1d area whi ·h it was h p d would a ·t as a p·1 rallel r rec t the E By the close f 1959, the uropean Free Trade Association ( FTA) had become a reality and the new economic regionalism was represented on the Continent by the Six of the Common Market and the Seven of the European Free Trade Association . It is important at this juncture to distinguish between the two terms "free trade area" and "customs union." In essence, a customs union is an arrangement among the participating countries whereby all internal barriers to trade among member arc dispen sed with and a common economi policy with respect to external trade is c tablished. Benelux was an example of uch a customs union even before the Common Market was a reality . The European Economic Community is an example of such a classic customs union with its ultimate external tariff for the most part being an unweighted arithmetic mean of the former tariffs of the individual members. However, the founders of the aimed at more than a cu tom union ; they de ired the subordin ation of the individual nation' monetary and fi cal policies, domestic political considerations , and agricu ltu ral a nd transport policie in favor of an integrated approach for the entire union. Thus, the Common Market not only involves economic inteMonthly Review • November-December 1962 gration, but also contemplates a large measure of political unification. In contra t with the customs union approach to the European Economic Community, the European Free Trade Association pur ued less extensive goa ls. Within this free trade area, al l barriers to internal trade were to be remov d , and in this respect there was no differt.:nce between the "customs union " approach of the Common Market and the "free trade area" approach. However, several important differences did distinguish the Jatter from the form r. The free trade area would not be characterized by a common ex ternal ta rifT, this bei ng left to the discretion of each country, and no extensive attempt would be made to harmoni ze agricultural, transp rt , fis al , monetary , or any oth r i sue of dome ·tic policy among the participants. All in all, the objectives of the European Free Trade Association were quite modest in contrast with those of the European Economic Community. The aims of the former were simply to liberalize trade among the members while a11owing almost complete autonomy in the conduct of domestic and international economic affairs. In the latter case, a more extensive economic and political integration was sought with the eventual end being some form of supra-national organization. rt was this clear-cut di tinction between the two schools of thought in the economic rebirth of Western Europe which preordained the outcome of the efforts to establish a free trade area for the whole of Western Europe. However, in a short time the success of the Common Market would cause a reassessment on the part of Britain, the leader of the EFTA. On July 31, 1961, scarcely more than a year after the European Free Trade A oc1at1on convention had been ratified by the member nations, Great Britain made public it decision to apply for full member hip in the European conomic Community. Although this issue is not yet resolved, the United Kingdom could 5 The Changing Shape become the seventh member of the European Commu nity. The fate of the EFTA in that event is conjectural; the loss of Great Britain would undoubtedly diminish its strength. Once the question of British membership has been resolved, the answers to this and other questions may be clarified . WORLD TRADE OVER TIME In 1938, the volume of world exports was eq ual to $23.5 billion; by 1948 the level of exports stood at $57 .3 billion; at the close of 1961 thi s figure exceeded $133 billion. This wa s a n absol ute increas in excess of $100 billion and a percentage gai n of more th an 450 per cent in less than 25 years . Although th e trade ligures a rc not meas ured in constant clo!Jars, the growth of world trade during the period is substantial , even after allowances have been made for world-wide price inflation. However, the gains in the volume of trade have not been distributed equally among the trading nations and while some have fared well both in an absolute and a relative sense, others have not. Table 2 shows the percentage of world exports accounted for by the developed and the so-called unde rd eveloped areas for th e period 1938 through 1960. It can be seen that the developed areas have managed not only to retain their traditional export share over this period, but have increased this share slightly - from about 65 per cent in 1938 to 67 per cent in 1960. As for the underdeveloped areas, the picture is not quite so bright. Beginning in 1938 with 25 per cent of world exports, this group increased its share to nearly 30 per cent in 1948, but from then to 1960 its share has steadily declined , reaching little more than 21 pe r cent in 1960. The fact that this downward trend in export shares wa s in ev idence before the European Economic Community or the European Free Trade Association had come into existence indicates that at least through 1958, these developments ought not to 6 Table 2 WORLD EXPORT SHARES BY BROAD AREA CLASSIFICATION (Per Cent of World Trade) 1938 1948 1949 and 1950 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 Developed Areas* 64.7 63.7 Underdeveloped Areas** 25.1 29.8 63.1 65.1 64.8 64.1 64.5 66.1 67.0 65.7 65.3 66.9 29.3 26.1 25.6 25.9 25.5 24.2 22.9 23.0 22.4 21.4 t t -- * United States , Canada, Western Europe, Japan , Australia , New Zealand , and South Afri ca. • 'Total of regions other than Developed Area s and Eastern Europe and China (mainland ). t Data for 1949 and 1950 are not comparable as they exclude trade with the Soviet Union and other Communist nat ions . SOURCE : U. N. Statistical Yearbook, 1961 . be blamed for the poor performance of the underdeveloped areas. Rather, a combination of factors such as changes in the demand pattern for products of these areas, and an increase in the avenues of supply for these items, which have resulted in a secular decline in their market prices, might more logically be held respon sible for the group's relative decline. Both the Latin American Republics and the newly merging African states, as well as others, are includ d among the underdeveloped areas. However, an interesting pattern has emerged in th e respective trading structures of the two groups of nations in response to structural changes elsewhere. A large number of the African states are presently "overseas associates" of the European Economic Community and thus will receive preferential treatment on their exports to that market. Consequently there has been Jess motivation for development of a regional trading bloc on that continent, although some regional groupings are emerging, or are in prospect. On the other hand , negotiations among the Latin American R epublics led to the formation of the Latin American Free Trade Association early in of World Trade 1960. This move logically can be interpreted as an attempt to achieve a more rational pattern of industrial development by providing access to a wider but stiJI protected market, as well as an attempt to set up a countervailing force in future negotiations with the European Economic Community. Whether it will serve to improve their position remains to be seen. If the distribution of world export shares in Table 2 is broken down, as in Table 3, to show the percentage of world exports accounted for by the major trading nation or regions, several intere ting a pects of the changing trade patterns may be seen . Although the total volume of world trade ha s in reased nsid rably ince 1938, int r stingly nough the percentage di tribution of world export shares in 1961 showed that only the two major trading nations, the United States and Canada, and the countries of the EEC, have managed to record gains in their respective positions during this period. However, for both the United States and Canada the high-water mark in export shares was reached a number of years ago. While both countries exceeded their prewar shares in 1961, they have been experiencing a decline in their respective positions for almost a decade. At the close of 1961, the Latin American Republics, Japan, and the AustraliaNew Zealand-South Africa group still had not regained their prewar share of world exports. As a matter of fact, the trend of export hares for the period is decidedly downward for all of the group except Japan, which alone show promise of regaining its former share of the world market if the upward trend for Japanese exports continues. Great Britain's decision to apply for membership in the European Economic ommunity implies an end to the pref rr d treatment for Au tralian and N w Zealand xports, a d velopment which can only erve to accelerate the downward trend in their world export shares. Referring again to Table 3, an interesting feature becomes apparent with respect to the relative export shares positions of the EEC and EFT A groups. Although Western Europe had slightly increased its share of world exports in 1%1 relative to 1938, the distribution of the trade gains among the countries constituting the present EEC and EFT A blocs was far from Table 3 Gains in World Exports Have Not Been Shared Equally By the Maior Traders World Trade Exports In MIiiion s of Dollars f . o. b. (Bold Face Type) Respective Shares of World Trade in Per Cent (Light Face Type ) 1938 World* United States of America Canada 1948 ;23,500 57,300 3,064 12,545 13.0 21.9 3,109 865 3.7 5.4 European Economic 4,360 6,500 Community 18.6 11.3 European Free 4,150 9,560 Trade Association 17.7 16.7 Latin American 1,710 6,520 Republics 7.3 11.4 Japan 1, 109* 258 4.7 0.5 Australia, New Zealand, 890 2,650 South Africat 3.8 4.6 Western Europe 9,240 17,780 39 .3 31.0 1951 1952 1953 1954 1955 1956 1957 1958 1959 1960 1961 82,400 14,888 18.1 3,750 4.6 13,790 16.7 12,230 14.8 7,790 9.5 1,355 1.6 3,470 4.2 28,230 34 .3 80,000 15,054 18.8 4,434 5.5 13,770 17.2 12,010 15.0 7,050 8.8 1,273 1.6 3,030 3.8 28,800 35.0 82,000 15,661 19.1 4,220 5.2 14,090 17.2 12,000 14.6 7,620 9.3 1,275 1.6 3,360 4.1 28,210 34 .4 85,500 14,986 17 .5 4,034 4.7 15,780 18.5 12,640 14.8 7,880 9.2 1,629 1.9 3,160 3.7 30,660 35 .9 93 ,1 00 15,430 16.6 4,386 4.7 18,370 19.7 13,760 14.8 7,960 8.6 2,011 2.2 3,400 3.7 34,470 37 .0 103,100 18,947 18.4 4,916 4.8 20,070 19.5 15,220 14.8 8,640 8.4 2,501 2.4 3,690 3.6 37,680 36 .6 111,100 20,682 18.6 5,094 4.6 22,470 20.2 16,1 90 14.6 8,650 7.8 2,858 2.6 4,090 3.7 41,340 37 .2 107,300 115,100 17,448 15.2 5,536 4.8 25,230 21.9 16,680 14.5 8,310 7.2 3,456 3.0 3,910 3.4 44,700 38 .8 127,500 20,325 15.9 5,563 4.4 29,730 23 .3 18,210 14.3 8,590 6.7 4,055 3.2 3,910 3.1 51,230 40 .2 113,040 20,670 15.5 5,790 4 .4 32,330 24.3 19,090 14.4 8,550 6.4 4,320 3.3 4,240 3.2 54,880 41.3 17,732 16.5 5,045 4.7 22,770 21.2 15,760 14.7 8,190 7.6 2,877 2.7 3,340 3.1 41,130 38 .3 *Excluding trade of China (Mainland ), Mongolia, North Korea , and North Vietnam with each other. **Although Korea and China (Taiwan) were part of Japan's customs area in 1938, the figures here shown have been adjusted to include the intertrade among the three areas . t Flgures for all periods have been adjusted to approximate trade of present customs area. NOTE: EEC treaty effective January 1, 1958; EFTA convention ratified in 1960. SOURCE: 1961 figures from U. N. Monthly Bulletin of Statistics, June 1962; all others from U. N. Statistical Yearbook , 1961. Monthly Review • November-December 1962 7 The Changing Shape equal. While the EEC countries were increasing their share of the expo rt trade from 18.6 per cent in 1938 to more than 24 per cent in 1961, those co untries in the EFTA saw their share of world exports decline from less than 18 per cent in 1938 to little more than 14 per cent at the close of 1961. Furthermore, while the figu res in Table 3 indicate vigorous growth for th e EEC n ations, a lmost the e ntire decade of the I 950's is characterized by a relative decline in the world markets for the EFTA group. A further example of the dynamism of the EEC in contrast with the EFTA nations i in terms of the abso lu te difference in their respective shares f world ex ports for th e p riod . In 193 8, the I E ' group of co untri es recorded $2 10 million more in world exp rts th an did their FT A cou nterparts; in 1948, however, the sca les had shifted in favor of the EFTA group by more than $3 billion. The shift was temporary, however, and could be attributed to the wartime destruction of the physical plant on the Continent as well as the attendant political turmoil. This was clearly evidenced by the figures for th e period 1951 through 1961. For example, in 1951, EEC countries recorded $ 1,560 million more in the volume of exports than did the EFTA. This marked the beginning of an unbroke n trend of eve r-widening absolute margins between the two groups, climaxed in 1961 by an excess of EEC exports of more th an $13 billion over EFT A shipments. A large portion of this increased EEC trade undoubtedly represents a stepping up of intra-EEC trade at the expense of traditional external markets as a result of the lowering of internal trade barriers. While these " trade diversion" effects of the Common M arket should not be overlooked, it shou ld also be poin ted out that the freeing of trade within th e Common M arket area must have also resulted in a considerable amount of " trade creation." For example, stati stics published by the United Nations show that the 8 U. S. share of exports going to the EEC increased from 13.5 per cent in 1959 to nearly 17 per cent in 1960, and again rose to more than 17 per cent in 196 l. :! However, it should also be noted th at during this same period Western E urope was undergoing a strong cyclical expansion which resulted in an increased demand fo r U.S. exports of capital goods. While it is generally recognized th at a shrinking share of world exports is con sidered undesirable, th e seriousness of such a situation varies with respect to th e relative importance which foreign trade assum es in the process of incom e creation for a ny particul ar co untry . An approximate meas ure of c hanges in th e relati ve impo rtance o f fo reign trade as a nati o nal in·omc-producing activ ity is th e per cnta 1 c which exports a rc o f gross na tional product ove r tim e for each coun try. Table 4 provid s this info rmati on for selected co untries, including all th ose within the EEC. For most of th e last decade, exports were from 10 per cent to more than 35 per cent of the GNP of the variou s countries comprising the Co mmon Market. Furthermore, in most instances for these same countries, exports a re an increasing proportion of the total nation al income over tim e. In th e case of Japan, ex po rts as a perce ntage of GNP have been ri sing almost tead ily since 1953 and were equ al to more th an IO per cent of total income from J 956 throu gh 1960. In the case of the United Kin gdom , Canada, and the United States , however, the role of exports as an income producer has diminished over the past decade. Since the ratio of exports to GNP for both the United Kingdom and Canada is more than three times as great as that of the United States, their declining role in world markets has a greate r impact on th eir respective economics than is the case for th e United States. However, the fact that ex ports are little more :!See Uni ted Natio ns S tatistical Y earbook, 1961 ; see also U . N . Monthly Bulletin of S tatistics. June 1962. of World Trade Table 4 EXPORTS AS A PER CENT OF GROSS NATIONAL PRODUCT 1948 4.9 20.6 22.0 United States Canada Belgium-Luxembourg France Germany (Federal Republic) Italy Netherlands United Kingdom Japan n.a. n.a. 7.7 17.9 13.8 n.a. 1951 4.5 18.7 31.6 11.6 1952 4.4 17.9 27.4 9.3 1953 4.3 16.5 24.9 8.8 1954 4.1 15.8 24.2 9.2 1955 3.9 16.0 27.7 10.1 1956 4.5 15.7 29.2 8.4 1957 4.7 15.3 27.7 8.9 1958 4.0 14.8 26.6 9.0 1959 3.6 14.8 27.7 10.7 1960 4.0 15.5 29.7 11.8 1961 4.0 12.3 10.1 34.1 18.4 9.6 12.4 8.0 35.2 17.2 7.8 12.7 8.0 33.7 15.7 6.7 14.1 8.1 33 .9 15.3 8.0 14.5 8.4 33.7 15.6 8.9 15.7 9.0 33.4 15.8 10.0 16.9 10.0 33.3 15.6 10.2 16.1 9.4 34.0 14.5 10.4 16.5 9.9 35.5 14.5 10.4 17.2 11.4 35.9 14.1 10.4 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. not available SOURCE : GNP f i gures f ro m U. N. Yearbook of National Account Stat istics, 1961 ; export fi gures fr om U. N. Yearbook of International Trade Statistics, 1959, Vol. 1. tha n 4 per cent of U . S. income does not mean th at th e impli ca ti ons o f a shrinking Ame ri ca n sha re o f wo rld ma rk ets arc not serious. T hese implicati o ns fo r th e domestic eco nomy dese rve furth r investi gation, b ut it is suffic ient to no te here th at th e passage of the T rade E xpansion Act o f 19 62 was predicated, to a substantial degree, upon an immedi ate and serious concern over America's declining relative position in world trade. CONCLUSIONS The economic justification for trade and exch ange among ind ividu als rests upon the opportunities which such trade afford s those pa rti es wh o volun ta ril y engage in trading activiti e to inc rease th eir level o f sati fac ti on or utility. Thi s applies qu ally well to trade between regions or states within a single country, or to trade between diffe rent nations. Therefore , the fewer the impediments to trade and exchange, the more easily individuals or nations may enjoy the gains attendant to these activities. The development of the various regional trading blocs di scussed in this article was Monthly Review • November-December 1962 characte ri zed by one ex tremely desirable effect. In eve ry instance, th e estab li shment of these r gio nal tra din g units res ulted in th gradu a l eliminati on o r redu cti on o f th e ba rri e rs to t rade within th eir bo und a ri es, the reby fac ilita ting trade among th e peopl es within that bloc. However , th e possibility does ex ist th at these same groups, which h ave on the one h and freed trade intern ally, may restrict trade with external markets in an effort to expand their domestic industries and insul ate them from the forces of worldwide competition. If thi s should happen, then some o f th e tangible gains from trad e m ay be largely vitiated and th e result will be a Jess th an opti mal allocation of th e wo rld 's economi c reso urces. A lthough the da nger whi ch is inhe rent in such " trade diversion" is a rea l one, th e re is equ al justi fica ti on for assumin g th at th e new structure o f world trade will , in th e Jong run , result in increased trade among economically stronger , well-defined region al trading blocs, thus affording to those individuals and nations the gains resulting from increased interregional as well as international trade. Only th e future can indicate which of these possibilities will m aterialize. 9 American Agriculture and the European Common Market I AN INDUSTRY as dynamic as American agriculture, longer-run developments frequently are important in evaluating the current situation. The adjustment problem confronting farmers in this Nation is primarily the result of technological advancement that has cau ed produ ctivity of resources to increa e more rapidly than demand for farm products. Under these conditions, it is necessa ry to have consid rablc mobility of reso urces in the domestic economy or to in rease demand for farm product if serious adjustment problems are to be avoided. Even though much research and educational work has been done on the problem of shifting resources within the economy, they have not shifted rapidly enough to prevent serious difficulties. At the same time, efforts have been made to expand the demand for farm products. Two approaches which have been taken include: ( 1) attempts to expand domestic demand for farm products by finding new u es for them and by ex panding per capita consumption, and (2) efforts to expand export demand for farm products. There are limitations to the achievements that can be attained by either of these approaches. This article will discuss agricultural exports briefly, evaluate some implications of the development of the European Common Market on the potential export demand for farm products produced in the United States, and point out th e major provisions contain ed in the Trade Expansion Act of 1962. N AGRICULTURAL EXPORTS During the past 2 years , approximately 15 per cent of all cash receipts from farm marketin gs in the United States has come from ex- 10 ports. Although a con iderable proportion of these exports was old for dollars, a sub tantial quantity was moved under Public Law 480 and by other special Government program . Measured in physical terms, movement during the p ast 2 year ha been at record-high levels. ince there i a fo d shortage in most areas of th e world , it is sugges ted frequently that th e outlook for a continued growth in export d mand for Am rican farm products is unu ualIy favorable. Such foreca ts often ignor both potenti al and actual difficulties . Although many underdeveloped nations have a great need for food and fiber, they frequently lack purchasing power to obtain farm products for dollars. The United States has attempted to overcome this difficulty through programs in which effective prices are reduced by export payments and in which surplus food and fiber are moved into foreign markets for local currcncie , by gift, and by barter. Although such programs can serve a u eful purpose both for the United States and for recipient nations, certain difficulties must be recognized. First, unless uch programs are handled with extreme care, they are likely to be viewed by other countries as "dumping." Second, they are costly and, therefore, dependent on the continued appropriation of relatively large sums of money. Only to the extent that such programs are carefully planned for long-range development in which future economic demand is created can they be viewed as providing permanent markets. 1n the fiscal year July 1, 1961-June 30, 1962, the United States exported $5 .1 billion worth of agricultural products . Major markets American Agriculture and the European Common Market EXPORTS TAKE BIG PART OF U.S. FARM OUTPUT Export Share of Total Production Fiscal Year Exports Fiscal Year 1954-60 Commodity Unit Wheat* Dried edible peas Rice (milled basis) Hops Tallow Nonfat dry milk Cotton Soybeans** Dried prunes Tobacco (farm sales weight) Raisins Rye, grain Barley, grain Cottonseedt Grain sorghums Dried whole milk Lard Corn Dry edible beans Flaxseed * 1954-60 Average Millions 391.6 1.2 15.2 14.9 1,229.6 521.3 4.6 139.9 91.1 548.6 93.6 5.4 73.4 1.4 54.4 39.2 522.9 149.4 2.6 6.7 bu cwt cwt lb lb lb bale bu lb lb lb bu bu ton bu lb lb bu cwt bu 1960-61 1961-62 Millions Millions 660.9 1.8 21.5 17.2 1,465.7 633.8 7.0 228.7 72.7 569.5 123.5 7.7 83.0 1.2 86.4 19.0 490.1 260.7 2.3 7.0 ** 716.5 2.0 20.4 18.3 1,631.5 809.2 4.8 236.6 85.8 584.5 127.9 7.5 81.7 Includes grain equivalent of flour. Includes bean equivalent of oil. SOURCE: U. S. Department of Agriculture . were Japan, the United Kingdom, Canada, West Germany, the Netherlands, India, Italy, United Arab Republic-Egypt, Belgium-Luxembourg, and Spain. Of the total exports, $3.5 billion were commerci al sales for dollars and $1.6 billion were moved under Public Law 480 and other Government program . Of the $5. I billion of farm products exported in fiscal year 1962, $1 .2 billion , or about 23 per cent, went to the six European Common Market countries. Exports to the Common Market countries accounted for about a third of the $3 .5 billion of products sold for dollars. Because of the current significance of the European Common Market and the fact that it is likely to become a substantially more important factor, the U. S. agricultural industry needs to be well informed on developments in the Market. TH E EUROPEAN COMMON MARKET The European Economic Community- commonly referred to as the European Common Monthly Review • November-December 1962 1.1 85.8 14.3 432.9 388.8 1.7 1.5 t Average Per Cent 36 36 43 34 40 35 34 32 30 28 23 21 19 25 15 37 20 4 15 18 1960-61 1961-62 Per Cent Per Cent 49 56 56 37 38 33 49 41 26 29 32 23 19 20 14 21 21 8 58 57 54 52 44 39 34 34 31 29 28 27 21 19 18 17 17 13 8 7 23 11 Includes seed equivalent of oil. Market-was officially established by a treaty signed by six countries in March 1957. The six countries signing the treaty were France, West Germany, Italy, Belgium, the Netherlands, and Luxembourg. Greece became an associate member this November. The treaty recogn izes the interests of certain over eas countrie and t rritories that have pecial links with the ommon Market countries and provides for ex pansion. Other countries seeking either full or associate membership include the United Kingdom , Ireland, Denmark, Turkey, Austria, Sweden, Norway, Switzerland, and Spain. The eventual objective is to conduct commerce freely within the area. There are to be no tariffs among individual member countries and no restrictions on movement of good , capital , ervices, or worker . It is anticipated, however that the Common Market, as a unit, will have a single policy on imports from "outside" countries . Important steps toward implementing the program already have been taken . Tariffs 11 American Agriculture and the among member nations have been reduced significantly and quota restrictions on industrial goods have been abolished. Some basic decisions also have been taken in formulating a common agricultural policy. Economic cooperation can be effective in restricting and eventually eliminating some of the intense nationalistic rivalries that have ex isted hi storically in Western Europe and have been responsible for much dissension. Furthermore, it is an effort to remove artificial barriers which have throttled business, impeded advancement, and caused suspicions among these nation . The effecti.veness of such coope ration at th e eco nomic Jevcl has been dcmonstrat d. Trad among member na ti ons has incrcas d substanti ally more than has trade with "outside" nations. The rate of economic growth, although starting from a lower base, has been greater in Common Market countries than in the United States. The attainment of the ultimate objective of harmony in all aspects of social and economic life will be a noteworthy achievement. On the other hand , it should be recognized that a major undertaking such as the Common Market usually cannot be attained without creating diffi cult problems. Some of these problems arc of particular significance to the agricultural industry in the United States. As was pointed out previously, the Common Market co untri es, along with those that may become associated with them , have been an important dollar m arket for United States farm products. Since many agricultural commodities can be produced more efficiently in this Nation than in Europe, there is potential for a considerable expansion of exports to Europe. On the other hand, it mu st be recognized that a number of difficult obstacles must be overcome before this potential can be realized. Historically , European nations have made inten sive efforts to become self-sufficient in th e production of many agricultural products. Beca use the Common Market countries have en12 couraged expansion of farm production, they now are insistent on protecting their agricultural industry from imports from "outside" countries. An analysis of the agricultural industry in these countries will be helpful in understanding why these nations are insistent upon maintaining and implementing protective devices. There are approximately 9 million farms in the six Common Market countries. More th an 5 million of these farms are 12 acres or less in size and frequently are composed of several scattered strips of land. Location and des ign of farm buildings often hamper mech anized hand ling of li vestock. U nd cr th sc circum stances , it is often diffi ·ult to us th e most fnci nt techniqu s. The Jarge number of sma ll farm , on which labor requirements are high, ha s resulted in farmers accounting for more than a fourth of the labor force . Furthermore, there has been a siza ble gap between farm and nonfarm income. The large proportion of farmers and the disparity in income have caused these countries to support prices of their farm products at high levels. In recent years, many new techniques have been introduced into European agri culture. By u in g these techniques, E uropea n farmers have bee n abJc to expa nd output rapidly. With price protection, th e e farmers now see an opportunity to improve th eir incomes. Without price protection and import controls, foreign producers would becom e a threat to their industry. Since a substantial proportion of their labor force is engaged in agriculture, the pressure for protection against imports from "outside" countries is great. Because of these developments, the export market for U. S. farm products is threatened, even thou gh the indu stry is more efficient in this Nation than in E urope. The threa t is largely an outgrowth of the immobility of labor resources between the agricultural and nonagricultural sectors of the economies. The problem in Common Market countries is more European Common Market difficult than that in the United States, since they have substantially more surplus labor resources in agriculture in terms of use of the most efficient techniques. Thus, they need to devote more effort to solving the structural underemploym ent problem in agriculture and getting a better balance between the agricultural and nonagricultural sectors of their economy than doe the United State . Until problem of this type can be solved and the desire for self-sufficiency in agriculture can be minimized, there will be considerable pressure on the Common Market governments to continue protectioni t policies . In fact , th e pressure for a continuation f such policies c urrently i grca tr in . . uropcan agricultur than it is in th United Sta tes. If certain of the policies urrcntly b in g prop scd arc implem ntcd , it will soon become more difficult to sell certain U. S. farm products such as wheat, poultry , feed grains, rice, tobacco , animal products, fats and oils, and certain fruits to the Common Market nations. Devices proposed by Common Market countries to protect their agriculture include variable import duties , fixed tariffs, and buying preferences. The purpose of variable import dutic is to protect farmer in the Common Mark et countries by offsetting the difference between the world price and the desired internal price through use of these levies . For example, if it is desired that the internal price of wheat should be $2.50 per bushel and it can be imported for $1.75 , the duty would be set at 75 cents per bushel. The duty can be changed from time to time as the spread between the desired price and world price varies. Variable duties make it particularly difficult to se11 in such markets, since they can be adju ted so as to prevent competition. Such duties, combined with the u e of fixed tariffs and buying preferences, make it virtually impossible to trade on an economic basis except to the extent desired by Common Market countries. Despite regulations promulgated by the ComMonthly Review • November-December 1962 mon Market, the United States has continued efforts to maintain grain exports to this important market. The ultimate success of these efforts is expected to depend on the level at which target prices finally are set. Bilateral discussion have led to an understanding with respect to trade in grains, which should help at least partly to maintain United States grain exports to Europe while the Common Market agricultura l policy is being implemented . Furthermore, the Common Market has agreed, upon adoption of a common agricultural policy, to enter into n ew negoti ations with the United States. According to th present schedule, external tarifTs on liv stoc k and meat produ ts arc to become fully -ITc live in the ommon Market by 1970. Similarly, by that tim , int rnal tariffs a rc to have be n aboli shed . xcept for variety meats, ta1low, hog grease, lard, and fatbackwhich are major U. S. livestock exports-duties have not been increased significantly for the bulk of livestock product exports from the United States. However, if current average livestock prices are maintained in the Common Market, production of livestock products likely will increase substantially. Such an increase in production could tend to reduce over-all import requirements. It should be pointed out also that in pcction and sanitary controls on many livetock products may continue to limit import into the Common Market area. The situation currently is quite fluid and, if variable levies are used to support prices at high levels within the Market, trade in livestock products between the United States and the Market could be hampered. There is some encouragement, however, in th e longer-run outlook for livestock product trade with the ommon Market. As wa pointed out prev iou ly, genera] economic conditions in Weste rn urope have been improving rapidly a nd are expected to continue to do so. Under these circumstance , per capita consumption of many livestock products is likely to increase . 13 American Agriculture and the To illustrate, per capita red meat consumption in Common Market countries currently is somewhat less than two thirds of that in the United States. With the increasing incomes of recent years, meat consumption has been increasing sharply and is likely to continue to do so. H demand for meat and packinghouse products expands rapidly enough, demand for meat imports from outside countries could increase, even with increased production within the original market and the entrance of meatexporting countries such as Denmark. Demand for feed grains also could increase under these condition . T he ex port situ ation for many other farm products is quite simil ar to that for the grain s and meats. If prop r agreement can b work d out, th e demand for agricu ltural xpo rts from the United States could po sibly expand substantially in the future. If such agreements cannot be worked out, there is reason for anxiety concerning the future of much of the export market for farm products from the United States. This is why it is important to keep informed on the continued efforts being made to work out trade agreements with the Common Market. Prior to the time th at the Trade Expansion Act of 1962 was passed , it was ex trem ely difficult even to attempt effective tariff negoti ations with the ommon M arket, si nce it nego ti ates tariffs on an across-the-board basis. Under previous legislation, the authority of the U . S. Government to conduct negoti ations was limited to concessions which could be granted in exchange for reciprocal agreements and to selective items. Authority was needed to negotiate on a comprehensive basis. TRADE EXPANSION ACT OF 1962 T he purpose of th e Trade Expa nsio n Act of 1962, as stated in Title I, are " ... through trade agreements affo rding mutual trade benefit - ( 1) to sti mul ate the economic growth of the United States and maintai n and enlarge 14 foreign markets for the products of United States agriculture, industry, mining and commerce; (2) to strengthen economic relations with foreign countnes through the development of open and nondiscriminatory trading in the free world; and ( 3) to prevent Communist economic penetration." Title II provides the authority for the President to enter into trade agreements and revise any existing duties or other import restrictions. Provision for tariff adjustment and other adjustment assistance is made in Title Ill, while Title IV contains a number of general provisions. Briefly, the Act gives the President authority to enter into trade agreements with foreign co untri es during the period from July I, 1962, to July 1, 1967, if he determine th at any xi ting duti s or other import restrictions are unduly burdening the foreign trade of the United States. To accomplish the objectives of the Act, the President, within limits, may modify or continue existing duty or other import restrictions as he determines to be appropriate to carry out proposed trade agreements. Except as otherwise specifically provided for in Title II, the President is limited to a 50 per cent reduction in any rate of duty from the levels prevailing on July 1, 1962 . One general exception is made for low-rate articles which a rc defi ned as those for which the rate of duty on July 1, 1962, was not more than 5 per cent ad valorem. Another general exception pertains to articles that are of special importance in trade between the United States and the European Economic Community. The President also is permitted to increase any duty to a rate not more than 50 per cent above the rate existing on July 1, 1934. Title II, Chapter 2 of the Act, contains the special provi ion concerning the European Eco nomic Community. Section 2'11 in this chapter gives the President authority to reduce rates by more than 50 p r cent in any trade agreement with the European Economic Community providing " . . . the United States and European Common Market all countries of the European Economic Community together accounted for 80 per cent or more of the aggregated world export value of all articles in such category." To determine which articles fall into this classification, the President is requested to select a system of comprehensive classification of articles by category and the Tariff Commi sion is to determine the articl s falling within each category of such system. Both the President's system of classification and the Tariff Commission's determinations are to be made public. Methods to be used for making a determination with respect to any catego ry of article arc stated in conside rable detail. Provi ion al o is made f r ce rtain ex lu sion s, requirements cone rning n go tiations, national security, administrative I roe dur s, and other it m of a gen rat nature. The Act provide considerable flexibility for negotiating with the Common Market countries on a comprehensive basis. Title I U of the Act provides for tariff adjustment and other adjustment assistance for workers and industries harmed by imports when industry-wide relief possible under the old law is not feasible. Chapter 1 of this Title specifies the procedures to be used in determining eligibility for assistance. Afte r eligibility has been determined , variou types of assistance arc provided for on an industry , firm, or worker basis . If the Tariff ommis ion determine that, as a result of concessions granted under trade agreements, an article is being imported into the United States in such increased quantities as to threaten serious injury to the domestic industry producing a competitive article, the President may: ( 1) provide tariff adjustment for such industry, (2) provide that its firms may request certification of eligibility for adjustment assistance, ( 3) provide that its workers may require certification of eligibility to apply for adjustment benefits. Assi tance available for firm includes Government loans, technical aid, and tax relief. Assistance to workers includes a weekly payment which can equal 65 Monthly Review • November-December 1962 per cent of the average weekly wage, training, and relocation allowances. SUMMARY AND CONCLUSIONS Trade is necessary for any economy to achieve the advantages of geographical specialization. In recent years, the economy of the United States has been the largest in the world within which goods and services have been permitted to flow more or Jess freely. Thus, the advantages of geographical specialization have been available within the Nation. Many commodities can be produced more efficiently outside this Nation 's boundaries, while others can be produced more efficiently in th e United States than in most other nations. Many farm products fall in the latter category. To the ext nt that each nation produces tho c items it can produce most efficiently and trades with other nations for th e products that they can produce most efficiently, the economic welfare of all nations is enhanced. It is for this and other reasons that the European Common Market was created. There is little doubt that the Common Market will be advantageous to those countries within the Market. It also can be advantageous for "outsid e" nations if the force s that dictate geographical specialization arc allowed to operate and the various nation arc p rmittcd to trade. Factors such as immobility of resource , customs, political considerations, and mi sunderstandings frequently cause nations to use devices designed to protect certain categories of their citizens. To accomplish such protection, various types of trade-restriction devices are used . Because of these devices, it is necessary for nations to enter into trade agreements with each other and make a mutual effort to minimize these devices if increased trade is to be encouraged. The Trade Expans ion Act of 1962 wa pa sed in order to give the President adequate authority to enter into trade agreements with other nations-particularly the European Common Market. 15 BANKING IN THE TENTH DISTRICT Deposits Loans Reserve City Member Banks District and October States Country Member Banks Reserve City Member Banks Country Member Banks 1962 Percentage Change From Sept. Oct. Sept. Oct. Sept. Oct. Sept. Oct. Loans Deposits Reserve City Member Banks Country Member Banks Reserve City Member Banks September 1962 Perce ntage Change From Country Member Banks Au g. Sept. Aug. Sept. Aug. Sept. Aug. Sept. 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 1962 1961 Tenth F. R. Dist. Colorado Missouri* N braska New Mex ico * Oki homa* Wyoming +9 +2 + 13 - 1 +5 t +8 +9 + 1 +17 . .... . ..,. + 2 +11 ** ** - 1 + 5 + 2 +11 - 2 + 1 1 4 + 10 +4 + 14 t ,:c,:c ,11,fc ** I 18 16 ** 2 1+1 1 - 2 + 8 t I 14 :;,1:: ** - 1 1 +12 ** ** , Kansas -* T enth District -- t t , + 2 + 8 + 2 + 10 + 1 + 11 + 2 + 8 ..,. :!:::: +1 +7 1 7 2 +8 12 3 !5 !8 >!i,:c ** + 4 17 1 r- 8 !3 I 13 *,:: +4 +6 -., :;:i;: t +11 + 1 + 18 - 1 + 10 t + 10 +2 + 11 1 -I 10 2 -j 6 - 1 12 +3 +7 + 1 + 8 +2 + 7 +2 +13 t +7 + 4 + 6 +2 +9 7 7 +4 t ,:,::c >!c>:c ·1· +5 1 10 3 9 ,:, ::c ::c:;, -j 4 6 :::::: ,i:::: portion only . ** No rese rve cities in this state . tLess than 0.5 per cent . NOTE: Due to the reclassification of certain Topeka and Wichita banks on Au gust 23, 1962, and Kansas City, Kansas, banks on Septembe r 6, 1962, from reserve city to country bank status , data for September 1961 and Octobe r 1961 have been adjusted to produce comparability with current figures . PRICE INDEXES, UNITED STATES Index Oct. Sept. Aug. Oct. Sept. 1962 1962 1962 1961 1961 Con sumer Price Index (1957-59 = l00L ---- ----- ·--· Wholesale Price Index (1957-59 ::- 100). .... -......__ Prices Received by Farmers (1910-14 = 100).__ _ Prices Paid by Farmers (1910-14 = lO0L----·- -- -·- 106.0 100.7 245 307 106.1 101.2 250 307 .__ 105.5 100.5 244 305 104.6 100.0 240 301 104.6 100.0 242 301 -- TENTH DISTRICT BUSINESS INDICATORS Value of Department Store Sales Value of Check Payments District and Principal Percentage change from previous year Metropolitan Areas Tenth Federal Reserve District. ...... Denver __ ·-·--· ··· -- ---·-- -· ----··-- -- ---·----· Wichita _·---··-······--··-·--·----···-----·-··· Kansas City.-·---· -- ··- --------------··--··Omaha ·---------···---· ·--·--··--·-·····--·-· · Oklahoma CitY---- --···------ -·-·---------Tulsa .·-- -·-- ----- ·---- ---· ·---·-· -···-·-· -·---- 16 Oct. Sept. 1962 1962 0 - 2 - 8 +3 +7 +11 - 10 +8 + 11 +2 +6 + 12 +4 +6 Ten Months Oct. Sept. Ten Months 1962 1962 1962 1962 +7 +7 +4 +6 9 + 11 +4 +4 2 +3 +8 +8 +5 +2 - 2 - 8 - 3 +6 - 4 0 +2 +3 0 +1 +7 +1 +5 +3 JnJex o/ MONTHLY REVIEW ARTICLE olrticle~ /or 1962 ISSUE Agricultural Outlook for 1962 ( 6 pages) ......... .............................. .January American Agriculture and the European Common Market (6 pages) ....... ............. November-December Average Labor Productivity As a Guide to Wage Adjustments (7 pages) .................................. March-April Business Credit Demands-Problems of Interpretation ( 6 pages) ............ July-August ARTICLE ISSUE Our Unemployment Yardsticks: Concepts and Measurement ( 7 pages) ................. ..... September-October Postwar Changes in the Pork Industry ( 6 pages) .................... July-August Postwar Growth and Di stribution of District Bank Deposits ( 6 pages) .. May-June Postwar Trends in District Bank Earnings ( 6 pages) ........ September-October Changing Shape of World Trade (7 pages) .................... November-December Relationship of Bank Size and Bank Earnings-Some Further Considerations ( 8 pages) ...................................... February Economic Recovery and Expansion ( 7 pages) ............................... .... ..... January Seasonal Patterns of Cattle Prices ( 6 pages) ........... ....................... ....May-June Meat Consumption and Livestock Price Trends (5 pages) ....... ............. March-April Soybean - An Alternative rop? ( 5 pages) ............................ .......... February Special J3ookletJ on J3anking ... The Research Department of the Federal Reserve Bank of Kansas City recently issued two booklets on banking which are available to the public without charge. The first, "Essays on Commercial Banking," contains nine independent studies which were originally printed in the Monthly Review and have now been published in book form for the convenience of teachers, students, and others. The second is "A Study of Scale Economies in Banking" and is based on a series of Review articles. Copies of either or both may be obtained on request to the Research Department, Federal Reserve Bank of Kansas City, Kansas City 6, Missouri.
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