2. THE EFFECT OF IMPORT RELIEF ON CONSUMERS As was noted previously, the Commission's recommendation will lead to sharply higher prices. This will be true for domestic as well as imported products since import competition serves to restrain domestic prices. The domestic industry argued before the Commission that a tariff increase would not harm consumers since retailers do not pass on the benefit of lower prices to consumers.14 This is absurd; imports do provide lower prices.15 The highly competitive nature of the retail industry ensures that Consumers will benefit from savings realized at the wholesale level. Imports have not taken a significant market share without providing the consumer with something domestic producers are unwilling or unable to offer. There can be no serious doubt that in the case of leather coats and jackets this something is lower prices. In any event, domestic industry's claim that higher tariffs will not harm consumers make little sense, unless they assume that the same retailers who do not pass on lower costs also do not pass on higher costs. This is nonsensical. Higher costs mean higher prices. Further, import relief is likely to severely limit consumer choice. For the reasons set forth above, it is Penney's belief that leather coats and jackets, at least those in the popular price category, will not sell at prices much higher than those now prevailing. Accordingly, if Congress decides to reinstate the Commission's recommendation, Penny will be forced to limit the range of merchandise offered in this category. Penney assumes that other mass retailers will find it necessary to make the same decision. Thus, consumers will be denied the option of popular priced leather coats and jackets, since such garments will no longer be available from any source. This will have the greatest impact on lower income consumers. The more affluent consumer will still have a choice because higher priced imports and domestic products will continue to be available.16 The Commission's recommendation is inflationary, and, as is true of virtually all import relief, discriminates against the consumer, particularly the low-income con sumer. 3. OTHER OBSERVATIONS The Commission's recommendation would apply to all imports regardless of source. Thus, imports from countries such as Brazil, Canada, Colombia, Israel, and Spain, who collectively account for less than 9 percent of domestic consumption,17 would be subject to higher duties. This fact illustrates the ill-considered nature of the Commission's recommendation. 4. CONCLUSION Import relief will not aid the domestic industry in any meaningful sense. Import relief will increase prices, will restrict consumer choice, and is inflationary. In view of the above, Penney believes that H. Con. Res. 383 should be rejected. Hon. CHARLES A. VANIK, K MART CORP., Troy, Mich., August 25, 1980. DEAR CONGRESSMAN VANIK: House Concurrent Resolution 383 should not be approved. Imposition of the U.S. International Trade Commission recommendation, via Resolution 383, would mean an approximate 500 percent duty rate increase for imported leather coats and jackets with an F.O.B. value of up to $150 each, with staged additional duties of somewhat lower additional rates over a 3-year period. As it happens, all leather coats and jackets imported by our company, and indeed probably by any discount department store, are bought at an F.O.B. price of well under $150. The impact of the harsh 500 percent duty increase is most punitive upon lower and middle income consumers. This large duty remedy would increase inflation, would discourage consumption (consumers will switch to substitute cloth 14 Petitioners Post Hearing Brief, at p. 18. 15 W. R. Cline, "Imports and Consumer Prices: A Survey Analysis," 55 Journal of Retailing 3 (1979). 16 The very high priced merchandise would be exempt from higher duties under the Commission's recommendation. 17 Report, table 1 (A-9) and table 11 (A-25). coats and jackets), and conceivably would dismantle healthy foreign competition to an irretrievable degree. Expedited adjustment assistance, as the President ordered on March 24, 1980, is the most effective, and proper, remedy for the domestic leather wearing apparel industry. Sincerely, JAMES C. TUTTLE MONTGOMERY WARD, Washington, D.C., August 21, 1980. Re President's disapproval of import relief to the domestic leather coat and jacket industry, H. Con. Res. 383. Hon. CHARLES A. VANIK, Chairman, Subcommittee on Trade, U.S. House of Representatives. DEAR MR. VANIK: Montgomery Ward appreciates this opportunity to present its views to the Subcommittee on the above-referenced matter. This statement is submitted for inclusion in the printed record of the hearings. In its January 24, 1980, Report to the President, the International Trade Commission recommended that he increase the present duty on leather coats and jackets dramatically over the next three years. On March 24, 1980, President Carter decided to deny import relief because such action would be inflationary and provide only dubious relief to the domestic industry. Montgomery Ward believes that President Carter's decision to deny import relief is economically sound. Indeed, in its comment to the Trade Policy Committee, Wards set forth arguments and data demonstrating that this "proposed remedy" would increase consumer prices sharply, reduce product availability, significantly injure Wards and other retailers, and all without effecting long term improvements in the domestic leather-wearing apparel industry. This comment remains probative and Wards attaches it for for your consideration. Thus, Montgomery Ward maintains that the evidence overwhelmingly supports President Carter's determination that the ITC's proposed remedy is unwarranted and injurious to the national economic interest. Yours very truly, Enclosure. PETER K. PITSCH, Attorney. MONTGOMERY WARD, SECRETARY, Trade Policy Staff Committee, Office of the U.S. Trade Representative, Washington, D.C. DEAR SIR: In its January 24, 1980 Report to the President, the International Trade Commission found that imports have seriously injured the domestic leather coat and jacket industry and recommended that the present duty of six percent ad valorem on these items be increased by 25 points in the first year, 20 points in the second year, and 15 points in the third year. Montgomery Ward vehemently opposes this proposed remedy because it would substantially increase consumer prices and reduce product availability, significantly injure Wards and other retailers, and not promote long-term improvements in the domestic leather wearing apparel industry. EFFECT ON CONSUMERS The proposed tariff hikes would seriously injure consumers by sharply increasing prices and product unavailability. Montgomery Ward has attempted, in the short time since the release of the ITC Report, to estimate the potential dollar loss to its customers. These estimates range between 1.5 and 3.2 million dollars in 1980 alone. These figures include both the effect of price increases and the dollar value of the consumer surplus attributable to the foregone purchases of those consumers priced out of the leather wearing apparel market. If the same dollar loss to sales ratio prevails in the domestic industry as a whole, the potential dollar loss to consumers would, in the first year alone, be a staggering 8 to 17 percent of the current dollar sales of leather coats and jackets. 1 An explanation of these estimates is contained in the appendix. These potential estimates are plausible because it appears that domestic producers will be unable to fill the current domestic demand at anything close to existing prices. There are three reasons for this gloomy assessment. First, from 1977 to 1979, U.S. shipments have constituted about one fourth of the total U.S. market. The following table, based on figures used in the ITC Report, gives the precise percentages.2 Thus, given existing levels of demand, the domestic producers would have to triple or quadruple production to keep prices from rising. Even adding in the unused capacity of the domestic industry does not significantly improve this picture. For example, if in 1978 (when the domestic industry's capacity was only 70.6 percent) the domestic industry had operated at 100 percent capacity, it would have filled only 26.1 percent of total consumption-an increase of 7.7 points. Second, the ability of the domestic industry to expand production even at higher prices is at least questionable. Although the ITC Report contends that the leather wearing apparel industry has low entry costs, it does not say whether there are adequate machines and facilities in the short run to triple or quadruple domestic production. For instance, although the Report states that the "heavy-duty sewing machines used to sew leather garments can be adapted in most cases, and with some loss of efficiency, to sew other leather articles and/or cloth garments", the implication is that lighter cloth sewing machines cannot be used for leather garments. If this relationship holds, the Trade Policy Committee should clarify whether the sewing machine manufacturers can satisfy the predictable increased demand for machines and at what increase in price. At this point, it appears probable that at least in the first year the domestic industry will be unable to expand production sufficiently to keep the prices of leather wearing apparel from increasing precipitously. Third, even if the domestic industry can quickly expand production, its prices are likely to be sharply higher. On balance, they already have higher prices than imports. In this regard, the ITC Report states: "Average unit values of imports are significantly lower than those of domestic producers' shipments even after the import values are adjusted with c.i.f. charges, duty and importer markup."5 Although this difference in average price may be attributable in part to differences in quality, the primary explanation appears to be higher costs of operation. As the ITC Report notes, the foreign producers enjoy significantly lower labor costs.6 Furthermore, any existing differences in the cost of operation will surely be exacerbated when the domestic industry's capital, material, and labor costs rise in order to attract the additional resources that will be needed to expand production. Thus, because of the domestic industry's small share of the market, various unknowns about its ability to expand production quickly, and the likelihood that its already high operation costs would increase substantially, Montgomery Ward fears that the proposed tariff hikes will cause sharp increases in leather wearing apparel prices and price many consumers out of the market. EFFECT ON RETAILERS Montgomery Ward and other retailers of leather wearing apparel will suffer two ill effects from the proposed tariff hike: (1) the higher prices will sharply reduce 2 ITC, Leather Wearing Apparel, Investigation No. TA-201-40, January 1980, p. A-13. 3 ITC Report at A-7, n.1. 4 ITC Report at A-17. 5 ITC Report at A-26. 6 ITC Report at A-8. sales in all three years, and (2) because many orders for leather goods antedated the ITC Report, retailers will suffer significantly lower profit margins in the first year of the proposed remedy. First, as the above analysis of the effect on consumers demonstrates, the proposed tariff hike will increase prices and reduce sales. Consequently, sales during the next three years will be sharply off and retailers will be adversely affected. As set forth in the Appendix, unit sales could fall as much as 28 percent. Along these lines, it should be noted that retailers' marketing and promotional efforts have helped create a market for leather wearing apparel. If the tariff increases and the concomitant higher prices make leather goods less attractive for retailers to market and promote, the remedy could have a depressing effect on the leather wearing apparel market (including domestic production) that would persist beyond its proposed three years. Further, the effect of the tariff hike in the first year could have a particularly serious effect on retailers' already slim profit margins. Because many leather goods orders were placed last November and December, retailers will be unable to adjust to the changed market conditions. If these early-ordered goods are assessed at a 31 percent duty, then retailers will have to shrink their profit margins to sell the suddenly more expensive imports. Accordingly, Montgomery Ward believes that the Trade Policy Committee should recommend that the remedy apply to those goods ordered after a final proposal is effective, if ever. EFFECT ON THE DOMESTIC INDUSTRY Finally, Montgomery Ward opposes the ITC's proposed remedy because the beneficial effects on the domestic industry will be ephemeral, perhaps in the long run harmful, and in any event, substantially smaller than the expected injury to consumers and retailers. The ITC Report provides little basis for believing that the proposed remedy will promote long-term improvements in the position of the domestic industry. As we have already stated, the Report itself documents that the domestic leather wearing apparel producers have higher costs and higher prices. Furthermore, during the period of the proposed remedy, these costs and prices will surely increase. However, when the arbitrary price advantage provided by tariff increases is lost, any expanded domestic production will once again have to meet the remorseless test of free and open competition. Without real improvements in efficiency during the course of the remedy, more rather than fewer firms and workers could be disadvantaged. The 45-page summary of the ITC investigation provides little comfort on this score. It devoted one short paragraph to the "Efforts of U.S. leather wearing apparel producers to compete with imports." Only 14 producers responded to the ITC's inquiry concerning their efforts made to better compete with imports. The firms' responses are neither specific nor promising. But more importantly, they beg the questions: Why could not these improvements have been implemented earlier? Why, if they will make their operations more efficient, could they not be done in the absence of a tariff? Thus, to the extent significant improvements are made, they cannot be attributed to the remedy. On the other hand, if no meaningful improvements are made in the competitive posture of the domestic industry, then any expanded domestic production caused by the tariff hikes will be cruelly curtailed when the remedy expires. In this vein, it should be observed that the primary effect of increased imports has to date been to expand the total market rather than displace existing domestic production and workers. From 1975 to 1978, imports expanded 246 percent (5,812,000 units) while U.S. shipments decreased by only 12.3 percent (311,000 units). Likewise, employment during this period was only slightly affected. The ITC Report states: "[E]mployment of production and related workers in the leather wearing apparel industry almost certainly rose from 1975 to 1976; it then remained stable in 1977 and declined slightly in 1978. Employment of production and related workers declined 15 percent in Janurary-August 1979, compared with employment in the 7 ITC Report at A-41. 8 The Report states: "Of the 14 producers which responded, five stated that they have established offshore facilities and have begun to import leather and leather garments to lower unit costs and fill-in product lines. Five firms cited improvements or purchases of new machinery to increase efficiency, and four firms mentioned efforts to cut materials and production costs. Other efforts mentioned by the respondents included expansion of sales forces, increased emphasis on styling, and the installation of computerized investory and billing systems." ITC Report at A-41. 9 ITC Report at A-13. corresponding period in 1978. The average hours worked per week by production and related workers in the leather wearing apparel industry remained stable from 1975 to 1978 at a little over 33 hours per week, suggesting some underemployment in the industry." 10 Nonetheless, the proposed remedy, by creating an artificial price advantage, will attract new firms and new workers. When the price advantage created by the tariff vanishes, the business and job opportunities will also disappear. Consequently, rather than benefitting the domestic workers, the proposed remedy may unfairly attract new workers whose jobs will be eliminated when the tariff increases expire. Extending the proposed three-year remedy will only delay the inevitable without addressing the fundamental problem. Indeed, the Trade Policy Committee should consider whether by insulating the domestic producers from the rigors of competition, the proposed remedy may only exacerbate the long-run position of the domestic producers and workers. CONCLUSION The Trade Act of 1974 was intended to protect domestic industries from the competition of imports in certain circumstances. The legislative history of the Act provides the following illustration: "If the choice is between (1) allowing an industry to collapse and thereby creating greater unemployment, larger Federal or state unemployment compensation payments, reduced tax revenues, and all the other costs to the economy associated with high unemployment, or (2) temporarily protecting that industry from excessive imports at some marginal costs to the consumer, then the Committee feels that the President should adopt the latter course and protect the industry and the jobs associated with that industry." 11 As the above analysis demonstrates, the present case and the proposed remedy do not fit that example. In contrast, the present circumstances do not include a collapsing industry, high unemployment and the attendant Federal and state government costs. Furthmore, the proposed relief from imports would exact a heavy, not marginal, toll on consumers and retailers. Finally, the proposed temporary relief will not effect fundamental change but actually might generate more financial strain and unemployment. For these reasons, Montgomery Ward strongly believes the proposed remedy is unwarranted and injurious to the national economic interest. Yours very truly, Enclosures. PETER K. PITSCH. APPENDIX To estimate the potential impact of a 25-point tariff increase on prices and sales, this analysis attempts to quantify the price-sales relationship of one widely sold item. In 1978-79, this item had sales of $700,000 and $620,000. (Wards total sales of men's and women's leather coats and jackets were roughly $19 million for both 1978 and 1979.) The following table gives the ticket prices and unit sales figures for 1977 through 1979: These figures can serve as the basis for quantifying the relationship between the price and quantity demanded during 1977 to 1978 and 1978 to 1979. The most common measure of the relationship between price and quantity is price elasticity. Price elasticity can be thought of as the percentage change in the quantity demanded of a good evoked by a one percent change in price. The following table gives the arc price elasticity for 1977 to 1978 and 1978 to 1979: |