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Arc price elasticity measures the average price elasticity over some range of the demand function. The following formula gives the arc price elasticity:
Arc Price Elasticity=(Q2-Q1/P2+P1). (P2+P:/Q2+Q1) These calculations assume that all other demand influencing variables have remained unchanged between the two years compared. Two possible exceptions in this case are taste and nominal income. However, because these three years saw significant changes in price, the price effect may predominate the income and taste changes. In any event, these calculations are intended to provide broad estimates. What that caveat in mind, arc elasticity provides a means of projecting the effect of a tariff-caused price increase on the sales of this item. Because at higher prices the demand should be more inelastic, the lower elasticity will be used in the following estimates.
It is necessary first to project what effect a 25-point tariff increase will have on this item's price. Before the ITC published its Report, the ticket price was scheduled to be increased roughly 27 percent due to material and labor increase: from $131.40 to $167.66. Assuming Wards prices this item to absorb the full 25-point increase, it is estimated that the average ticket price would go up approximately 60 percent: from #131.40 to $210.00. To illustrate the effect of even a small tariff increase and to provide a lower limit on the potential consumer loss, all the loss estimates will be made for two ticket prices, $185.00 and $210.00.
To estimate the dollar loss to consumers from possible tariff increases, unit sales are calculated for the different prices. The following table gives those results.
1 Arc price elasticity minus 1.445.
Without any tariff increases, the 1980 price would be $167.66 and the 1980 quantity demanded would be 3323. With a 25-point tariff increase, however, the price is $210 and demand is 2371.
Thus, the dollar loss to consumers equals the sum of the money paid in increased prices and the dollar value of the consumer surplus attributable to the foregone sales. The former component in this case equals (2371) ($210-$167.66)=$100,388. The latter component can be approximated by taking one-half of the product of the differences in prices and quantities demanded; i.e., 12 ($210-$167.66) (33232371)=$20,153.84. Therefore, the total dollar loss from the tariff equals $100,388 plus $20,153 or over $120,000. A similar calculation for the smaller tariff increase gives a dollar loss of $53,719.
The following graph illustrates both types of consumer loss:
The vertical lines indicate the additional dollars paid for the garment by those consumers who continue to buy it at the $210 price. The cross-hatched area indicates the dollar value of the consumer surplus attributable to the foregoing purchases.
The estimates of potential dollar loss to consumers, $54,000 and $120,000, represent roughly 8 and 17 percent of the $700,000 total sales for this item in 1978. If the same percentage losses apply to Montgomery Ward's $19 million in sales of leather coats and jackets, then Wards' customers would lose between 1.5 and 3.2 million dollars in 1980 alone.
NATIONAL RETAIL MERCHANTS ASSOCIATION,
Washington, D.C., September 8, 1980.
DEAR MR. CHAIRMAN: On behalf of the National Retail Merchants Association, I am writing to express NRMA's opposition to H. Con. Res. 383, now pending before the Ways and Means Committee. If passed by the Senate and the House of Representatives, this resolution would reverse the President's decision not to impose import restrictions on leather coats and jackets and, in so doing, would cause the tariff on most of these products to be increased from 6 percent to 31 percent ad valorem. 1
THE PRESIDENT'S DECISION RECOGNIZES THE HARM TO THE CONSUMER AND THE DOUBTFUL BENEFIT FOR THE DOMESTIC INDUSTRY OF THE ITC'S RECOMMENDATION
In the testimony presented by the Administration at the August 26 hearing held by the Trade Subcommittee, the President's decision was clearly explained and amply justified.
The President chose to give priority to trade adjustment assistance for workers, communities and firms, and rejected the heavy tariff increase proposed by the ITC. He did so because of the inflationary nature of the ITC's recommendation and because the domestic industry could not demonstrate that import restrictions would help it adjust effectively and become any more competitive with imports once the relief expired.
The validity of the President's judgment is clear form a brief review of the characteristics of the market for leather coats and jackets and of the foreign and domestic manufacturers who serve it.
IMPORTS CREATED AND SERVE MARKETS THAT ARE NOT SERVICEABLE BY U.S.
PRODUCTION According to the ITC, consumer demand for leather coats and jackets increased significantly from 1975 through 1978. Our experience indicates that this growth was due almost entirely to the ability of Far East suppliers to provide the American consumer with fashionable, high quality, popularly priced leather coats and jackets. Given that production of these quality fashion garments is extremely labor intensive, it is most unlikely that domestic producers will be able to service the market created by imports, particulary in light of the substantial wage differential between the U.S. and overseas countries.
Without the combination of fashion, high quality and moderate prices, consumer demand will evaporate as quickly as it appeared. Indeed, price increases in 1979 and 1980, brought on by worldwide cost increases in raw materials, have already caused a significant decline in sales of all leather coats and jackets, with import sales down 30 to 40 percent. The ready availability of alternative products not made of leather and the continued perception of leather coats and jackets as luxury items are the obvious explanations for the price sensitive nature of this market.
This price elasticity is a critical consideration in determing whether the proposed tariff escalation will provide any assistance to the domestic industry, because the domestic industry has never been able and, in our opinion, will not be able in the future to provide consumers with such fashionable, popularly priced, high quality leather coats and jackets. This basic fact, we believe, dooms the import "relief" mechanism to certain failure as a vehicle for promoting a more competitive domestic industry.
The reason that the domestic industry is in this situation is readily apparent. As noted, the production of leather coats and jackets is highly labor intensive. Moreover, production of fashionable, quality garments, with an emphasis on hand-worked styling and detailing—the type of imported garment that has done so well in the
1 The U.S. International Trade Commission recommended that the tariff be increased twentyfive percentage points in the first year of relief, twenty percentage points in the second year, and fifteen percentage points in the third year.
U.S.-demands a very skilled cutting and stitching labor force. The domestic industry simply does not have a pool of these kinds of skilled workers to draw from. Further, the wage differential between any such U.S. workers and those in other countries is insurmountable.
Given the experience of 1979 and 1980, which demonstrates that consumers are simply unwilling to pay higher prices for leather garments, there is no realistic possibility that the domestic industry can compete effectively in the current market served by imports. Clearly, if fashionable, high quality imports have been losing sales due to price resistance by consumers, it is inevitable that domestically produced garments—higher priced, less stylish and of lower quality due to high labor costs and low labor skills will fare far worse.
IF GRANTED, THE 3-YEAR “TEMPORARY” RELIEF FROM IMPORTS WOULD BE ONLY THE
BEGINNING OF LONG-TERM IMPORT PROTECTION We are concerned that a three-year tariff increase might entice segments of the domestic industry into the mistake of making investments which never pay off. The industry-shielded temporarily from more efficient foreign producers—will, in effect, be encouraged to attempt to develop production capacity for the market segment now served almost entirely by imports. Unfortunately, we believe the domestic industry will be unable to match the high quality and moderate prices of current imports.
Moreover, the poor performance which we believe is inevitable will force the industry to make repeated demands for protection from imports. The “escape clause" process, under which the present case was brought, allows an industry to seek renewal of any import relief obtained, making the present three-year request actually a six-year proposition. Further, it is our understanding that this industry is already seeking permanent protection from imports through coverage under the Multi-Fiber Arrangement. In short, the present request would be but the first installment on a continuous, but fruitless, program of protection.
Unlike the tariff increase, which would encourage the industry to attempt to compete in a market segment where we believe it will never be competitive, trade adjustment assistance will encourage the industry to develop areas of possible market strength. Investments will be made with the assurance that the near and long-term competitive situation will be the same.
THE CRUDE PROTECTION RECOMMENDED BY THE ITC WILL SERVE ONLY TO DEPRIVE
CONSUMERS OF CHOICE, VALUE, AND STYLING As indicated above, we believe that the only demonstrable impact of the proposed tariff increase would be to increase the price of leather coats and jackets, both imported and domestically-produced. While the exact price increases to the consumer will vary according to the garment's initial costs and other factors, the recent market experience demonstrates that consumers will resist any price increases and that demand for leather garments will contract correspondingly. To the extent that consumer demand is eliminated—which is sure to happen, given the clear evidence of market contraction in the face of rising prices in 1979-80—there will be no benefit to the domestic industry.
There will, however, be injury to the American consumer, in both product choice and product cost. While there is no claim that leather coats and jackets are major elements of any index of inflation, the price increases that will occur will be very real to consumers of this product. Nor should the cumulative effect on inflation of import restrictions of this kind be dismissed.
A series of private and government studies have demonstrated conclusively that increases in trade barriers, whether they are tariffs or quotas or combinations of both, increase prices and reduce product choice. As Professor David G. Hartman of Harvard University's economics department stated, in a 1979 paper, "Whatever form it takes, protectionism is a subsidy to a particular industry paid for by the consumer in higher prices.” 2 William R. Cline, Senior Fellow of the Brookings Institution, in a study conducted in 1978, found that:
“Protection would aggravate inflation in two ways. First, by reducing the availability of cheaper imported goods, increased protection would cause a shift to more costly domestic supply. Second, by limiting the availability of total supply, protection would lead to an indirect rise in prices, as domestic firms raised their prices and consumers paid more in order to reach a new equilibrium between smaller
2 Hartman, "Costs of protectionism", (pamphlet), Washington, D.C.
supply and, therefore, smaller demand (which could be reduced only by the discouragement to consumption coming from higher prices)”:3
A 1978 study of the textile and apparel industries by the Council on Wage and Price Stability found that the 29.3 percent average tariff on apparel imports costs American consumers $2.7 billion a year, that quotas on the quantity of goods which 18 foreign countries are permitted to sell to the United States cost consumers $369.4 million a year, and that the cost per textile job "protected” through these tariffs and quotas is $81,000.4
Most recently, a Federal Trade Commission staff report, which investigated import restrictions on CB radios, color televisions, sugar, nonrubber footwear, and textiles, concluded: “The result of this study is that the costs of protection clearly and considerably exceed the benefits of reduced adjustment. This is true across the diverse industries of our study ...”5
For the reasons outlined above, NRMA urges Congress not to overturn the President's decision in this case.
By way of background, NRMA is a national, non-profit trade association composed of over 3,500 members who operate more than 35,000 department, chain and specialty stores in the general merchandise retail industry. Our members have an aggregate annual sales volume of approximately $100 billion and employ over 2.5 million workers.
If you or any member of your staff have any questions concerning NRMA or our position on this issue, please do not hesitate to contact me at 223-8250. Thank you for your consideration on this matter. Sincerely,
VERRICK O. FRENCH, Senior Vice President, Governmental Affairs.
STATEMENT OF DAVID J. STEINBERG, PRESIDENT, U.S. COUNCIL FOR AN OPEN
WORLD ECONOMY (The U.S. Council for an Open World Economy is a private, non-profit organization engaged in research and public education on the merits and problems of achieving an open international economic system in the overall national interest. The Council does not act on behalf of any private interest in this case or in any other respect. Its sole standard is what the Board of Trustees perceives to be the total public interest.)
SUMMARY Congressional override of the President's rejection of import restrictions on leather coats and jackets would sanction an International Trade Commission analysis and conclusion which have significant shortcomings. The President's handling of this case, as evidenced in the statement announcing his decision, is itself not without shortcomings. For Congress to side with the Commission would only compound what is already an unsatisfactory performance by the two other actors in this trade-policy drama. For Congress to do so for reasons that are certain to be laden with short-run political considerations would make the mistake of such override even more reprehensible.
This testimony is in opposition to House Concurrent Resolution 383 which would override the President's denial of import restrictions to U.S. producers of leather coats and jackets valued at not over $150, and would thereby put into effect the International Trade Commission's recommendation of additional tariffs on these imports: increases of 25 percent ad valorem in the first year, 20 percent in the second year, and 15 percent in the third year. Such Congressional intrusion in this case (a case where the Commission found serious injury from imports in a 4-0 vote) would make a triangle of faulty performance out of what are now less-than-adequate judgments by both the International Trade Commission and the President (although the President's judgment seems somewhat the better of the two). To install the Commission's judgment in place of the President's judgment would be the worst possible choice.
* Cline, "Imports and Consumer Prices: A Survey Analysis,” 55 Journal of Retailing 3, 4 (1979)
Council on Wage and Price Stability, “Textiles/Apparel,” Washington, D.C. (July 1978), at 66, 68, 70.
5 Morkre, Tarr, "Staff Report on Effects of Restrictions on United States Imports: Five Case Studies and Theory,” Bureau of Economics of the Federal Trade Commission (June 1980) at 198.
SHORTCOMINGS OF THE ITC JUDGMENT Not to the exclusion of other faults that may be found in the Commission's analysis and conclusion (possibly including the very finding of serious injury), neither the staff report nor the judgment reached by the Commissioners themselves reveals analysis (as distinct from the brief recording of informational returns from questionnaires) of industry efforts to compete more effectively with imports. Section 201(b)5 of the Trade Act of 1974 requires the Commission to "investigate and report” such efforts, and at least by implication requires the President to evaluate such efforts. The Section's legislative history indicates that the Commission is itself expected to evaluate such efforts. In its commentary on this Section, the Senate Finance Committee's report on the “Trade Reform Act of 1974" (page 122) states: "The escape clause is not intended to protect industries which fail to help themselves become more competitive through reasonable research and investment efforts, steps to improve productivity and other measures that competitive industries must continually undertake.”
ITC investigation and reporting in this regard-only cursorily handled in this case as in all other import-relief cases I can recall (at least under the Trade Act of 1974)—are not only explicitly required by law as essential to the President's fulfillment of his responsibilities in such cases; they implicitly call for Commission analysis, and also for Commission inquiry (and, later, Presidential judgment in the cases that reach him for decision) into any impediments to adjustment efforts, particularly the extent to which government domestic policy (statutes, regulations, etc.) may inexcusably be impeding such efforts. To the extent that such impediments exist, they should be corrected. Such reforms belong in a coherent policy of constructive assistance to an ailing industry, regardless of whether imports are restricted.
An industry-wide adjustment strategy-over and above any "adjustment assistance” (as the term has come to be known) to particular firms, workers or communities, and with or without import restriction-is one of the options the President may choose (and should choose) in addressing the problems of an industry seriously injured by imports. The Trade Act does not explicitly provide for it, but nor does the Act prevent it. The logic even of the existing trade legislation underscores the merit of such an approach.
Proper ITC analysis in this escape-clause case would have provided the President with the aforementioned adjustment material to help him carry out his responsibilities in this manner. The Commission has not fulfilled its function in this respect. Nor, for his part, has the President taken steps to get the Commission to do so.
Having omitted detailed attention to the industry's adjustment problems and needs, the Commission proposes import-control subsidies (which is what tariff hikes amount to) as the sole remedy insofar as government action is concerned. Applying uniformly to the whole industry, import restraints provide windfall gains to companies that may not need government help without dealing incisively with the problems of companies that do need government help. Helping both the stronger members of the industry and the weaker members in this manner could very well place the weaker members at an even greater disadvantage within their own industry, offsetting any benefits that may tend to result from import controls. It is not clear from the Commission's analysis which sectors of the 100-firm industry would benefit from import restrictions, which would not and whether other remedies, on an industry-wide or other basis, may be necessary so far as government action is concerned. Nor (a fault with the escape clause as written and hence not influencing my criticism of the handling of this particular case) is there any industry commitment as to what the industry will do on its own as a quid pro quo for import controls. This array of ommissions adds up to the "pig in a poke” approach which has characterized escape-clause legislation and proceedings far too long.
SHORTCOMINGS IN THE PRESIDENT'S JUDGMENT The White House, accepting the Commission's finding of serious injury but rejecting the Commission's proposed remedy of tariff increases, emphasizes that "expedited adjustment assistance is the most effective remedy . . . (and) is the only positive action that would aid the adjustment process of the industry without being inflationary or possibly causing a further erosion in consumer demand by further increasing prices.” However, the White House has not moved comprehensively and imaginatively to ensure a fully developed adjustment strategy to deal effectively with the industry's problems. The President's emphasis on the adjustment process is nevertheless superior to the Commission's exclusive emphasis on import restriction, which the ITC sees as buying time for the adjustment efforts which some producers told the Commission they would undertake (although the industry is not legally committed to such efforts).