This is to certify that the thesis entitled THE STRUCTURE OF TRANSPORTATION COSTS IN INTERNATIONAL TRADE presented by Don P. Clark has been accepted towards fulfillment of the requirements for Ph. D. degree in Economics Department of Economics MMQMZM M31 Lil/L’W Major professor Date June 1. 1978 0-7 639 © 1978 IDN PHILIP CLARK ALL RI GHTS RESERVED THE STRUCTURE OF TRANSPORTATION COSTS IN INTERNATIONAL TRADE BY Don P. Clark A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1978 ABSTRACT THE STRUCTURE OF TRANSPORTATION COSTS IN INTERNATIONAL TRADE BY Don P. Clark This study had three objectives. The first was to estimate the structure of ocean liner freight rates; that is, the relationship between commodity character- istics and rates charged for shipping them. A second aim was to compare the level of effective protection afforded U. S. manufacturing industries by the structure of international transportation costs and by tariffs. In the final section, effective protection estimates were used to gain insight into the relative factor pro- portions structure of international trade. Three sets of effective protection calculations were presented in this study. First, rates of effective protection stemming from transport costs and post- Kennedy Round nominal tariffs were provided for fifty- four United States import competing industries. A second set of estimates compared the magnitude of the Don P. Clark barrier imposed by transport costs against U. S. export industries with that provided U. S. import competing industries in trade with the nine country European Commu- nity and with Japan. In making these comparisons, the different manner in which tariff and transport cost structures interact under alternative import valuation systems was examined. Lastly, nominal and effective pro— tection rates were assessed for U. S. productive activi- ties by stage of fabrication. Results indicated that the overall degree of pro- tection afforded U. S. industries by transport costs exceeded the level of protection afforded by post-Kennedy Round nominal tariffs. The ranking of industries by com- bined levels of effective protection was observed to differ from that suggested by a comparison of effective tariff rates alone. Whether measured in nominal or effec- tive terms, protection from transport costs was not found to bear more heavily on U. S. export industries than on U. S. import competing industries. ‘Transport costs did not display a tendency to escalate with stage of proces- sing. A significant positive relationship was estab- lished between the percentage of unskilled labor in U. S. manufacturing activities and both combined nominal and effective rates of protection from transport costs and Don P. Clark tariffs. By erecting a substantial barrier against relatively unskilled labor intensive imports, both barriers can be held reSponsible for the Leontief Para- dox. TO Lola R. Dodge ii ACKNOWLEDGMENTS I wish to express my sincere appreciation to Professor Mordechai Kreinin, Chairman of my dissertation committee, for his guidance and support during the course of this work. Professors Carl Liedholm, Patric C. Larrowe and John L. Hazard have generously contributed their time and offered valuable comments. To each of these men, I express my gratitude. A special note of thanks is due Professor John L. Hazard for his profes- sional insight and help in identifying data sources. I would also like to thank Robert Nevius for his assistance in computer programming and Nancy Heath for her diligent typing of this manuscript. iii TABLE OF CONTENTS Page LIST OF TABLES . . . . . . . . . . . . Vi LIST OF FIGURES O O O O O O O O C O O Viii Chapter I. INTRODUCTION . . . . . . . . . . 1 II. THE INTERNATIONAL SHIPPING INDUSTRY . . 8 2.1 Introduction . . . . . . . . 8 2.2 Shipping Conferences . . . . . . 10 2.3 Government Review of Shipping Con- ferences . . . . . . . . . 12 2.4 Conference Rate Making--Theoretical Analysis . . . . . . . . . . 14 2.5 Conclusions . . . . . . . . . 18 III. EMPIRICAL VERIFICATION OF THE CONFERENCE RATE-MAKING PROCESS . . . . . . . . 20 3.1 Introduction . . . . . . . . 20 3.2 The Freight Rate Estimating Equation . . . . . . . . 21 3.3 Data and Methodology . . . . . . 23 3.4 Regression Results . . . . . 25 3.5 Discriminatory Ocean Freight Rates: Empirical Investigation . . . . . 29 3.6 Conclusions . . . . . . . . . 40 IV. INTERNATIONAL TRANSPORTATION COSTS, TARIFFS AND THE CONCEPT OF EFFECTIVE PROTECTION . . . . . . . . . . . 42 4.1 Introduction . . . . 42 4.2 The Effective Freight Factor Model . 44 4.3 Freight Factor/Tariff Structure Interaction Under Alternative Valuation Bases . . . . . 48 4.4 Policy Implications of the Effective Protection Concept . . . . . . 56 iv Chapter 4.5 4.6 Previous Empirical Studies . . . . Conclusion . . . . . . . . . V. EFFECTIVE PROTECTION CALCULATIONS: DATA AND U‘lUl U1 U'IU'I U'lnh w NH METHODOLOGY . . . . . . . . . Introduction . . Industry Output and Input Identifi- cation . . . . . . Imputed "Free-Trade- Frictionless" Input Shares . . . . . . . . Nominal Tariffs and Freight Factors . Nontraded Inputs . . . . . . . VI. PROTECTION FROM INTERNATIONAL FREIGHT FACTORS AND FROM TARIFFS: EMPIRICAL EVIDENCE . . . . . . . . . . . 6.1 Introduction . . . . . . 6.2 United States Nominal and Effective Rates of Protection: Industry Level Estimates . . . . . . . 6.3 Nominal and Effective Rates of Protection in the United States, the European Community and Japan . . . 6.4 Tariff and Freight Factor Escalation: Empirical Evidence . . . . . . 6.5 Recent Changes in Freight Factor Levels . . . . . . . . . . 6.6 Conclusion . . . . . . . . . VII. TARIFFS, FREIGHT FACTORS AND LABOR PRO- TECTION IN UNITED STATES INDUSTRIES . . 7.1 7 2 7 3 7.4 7.5 Introduction . . ' . . . Rates of Protection, Labor Intensity and the Leontief Paradox . . Empirical Test of the Travis Hypothe- sis . . The Protection of Unskilled Labor . Conclusion . . . . . . . . . VIII. SUMMARY AND CONCLUSIONS . . . . . . APPENDIX . REFERENCES Page 63 65 67 67 68 75 77 82 87 87 88 97 103 105 109 111 111 112 114 115 119 122 126 129 Table 3.1 3.2 6.6 LIST OF TABLES Page Freight Rate Estimating Equation: Regres- sion Results . . . . . . . . . . 26 Freight Rates on Selected Inbound and Outbound United States Foreign Trade Routes 0 O O O 0 O O O O I O O 32 Tariff and Freight Factor Interaction Under the f.o.b. Import Valuation System . . . 55 United States Industry Categories . . . 70 Selected Inbound and Outbound United States Foreign Trade Routes . . . . . 80 Estimated Nominal and Effective Rates of Protection from United States Post- Kennedy Round Tariffs and Freight Factors . 89 Correlations Between Nominal and Effective Protection Measures for the United States . 93 Nominal and Effective Rates of Protection for United States Imports and Exports in Trade with the EurOpean Community and with Japan . . . . . . . . . . . . . 99 Correlations Between Nominal and Effective Protection Rates for the United States, the EurOpean Community and Japan . . . . 101 United States Nominal and Effective Rates of Protection from Post-Kennedy Round Tariffs and Freight Factors by Stage of Fabrication . . . . . . . . . . . 104 Recent Trends in Freight Rate and U. S. Import Unit Value Indices . . . . . . 106 vi Table 7.1 Page Regression Results: Rates of Protection on Labor Intensity . . . . . . . . 116 Regression Results: Rates of Protection on Percentage of Unskilled Labor . . . . . 120 vii LIST OF FIGURES Figure Page 3.1 Trade Route No. 29, Far East/U. S. PaCific Ports 0 O O O O O O O O O 35 3.2 Trade Route No. 5-7-8-9 U. S. North Atlantic/Western Europe . . . . . . . 36 viii CHAPTER I INTRODUCTION Transport costs insulate domestic producers from foreign competition as do such artificial restrictions as tariffs and import quotas. Insofar as freight charges reflect the actual service cost of transporting commodi- ties, the "natural" protection afforded to domestic indus- tries from freight charges differs from artificial tariff protection in that the former is compatible with economic efficiency and does not entail economic waste. The usual practice of assuming "zero transport costs" in expositions of standard international trade models stems from a recog- nition that such charges are important: so that the exclu- sion of their effects from the analysis must be made explicit. Transportation costs are changing in importance relative to tariffs with each new round of multilateral tariff reductions, exchange rate realignments and petro- leum price increases. Yet, there have been few studies of even nominal shipping charges; and previous attempts to compare effective rates of protection stemming from actual transport charges with that of tariffs employ transport cost information more than a decade old. 1 This study has three purposes. The first is to examine empirically the commodity structure of ocean liner freight rates, i.e., the relationship between commodity characteristics and rates charged for shipping them. A second goal is to compare the degree of effective protec- tion afforded United States manufacturing activities by transport charges and by tariffs. Finally, these esti- mates are used to gain insight into the relative factor prOportions structure of U. S. production and trade. Data on transport charges are obtained from liner conference freight rate schedules maintained on file at the Federal Maritime Commission. Rates are normally quoted on a per unit basis. To estimate their influence as a barrier to trade, the charges must be transformed into ad valorem equivalents. Unit freight rates expressed as a percentage of import unit values are commonly refer- red to as "freight factors." The level of commodity freight factors and their stability over time will depend on the pricing policy of ocean liner conferences. A theoretical assessment of conference rate-making behavior is presented in Chapter II. Product unit value, the stowage factor (ratio of volume to weight), and competi~ tive conditions on the trade route are established to be the major factors responsible for commodity differentiated rates. Chapter II assesses empirically the relative importance of each rate-making factor in explaining varia— tions in freight charges among individual commodities. This analysis is extended to investigate whether inbound- outbound rate differentials exist on commodities moving in United States trade after product and route characteristics are taken into account. The degree of protection afforded domestic pro- ductive activities from freight factor and from tariff structures is estimated by employing the effective pro- tection model commonly used to analyze the restrictive effect of tariff structure alone. Balassa (5) has sug- gested the model's application to freight factor protec- tion rate calculations, but did not provide empirical estimates. This effective protection concept recognizes that trade barrier structures affect production activities in two contrasting ways. First, nominal duties on the imported final products cause a divergence between domes- tic and foreign relative prices, which serve as a subsidy to import competing activities. Second, duties on imported inputs tax users of these materials by raising their cost. Rates of effective protection are arrived at by determining the net subsidy to or tax on domestic value added in the various productive processes. The effective rate of freight factor protection is defined as the percentage difference between industy value added per unit of output under freight factor protection and what value added would have been in the absence of such charges. Chapter IV presents the analytical framework required to estimate effective freight factor and tariff protection rates. A discussion of data sources and methodology follows in Chapter V. Three sets of effective protection calculations are presented in Chapter VI. First, comprehensive indus- try level estimates of effective protection rates will highlight the manner in which freight factor and tariff structures interact to determine the combined level of protection afforded each U. S. import competing industry. Tariffs, unlike freight factors, are determined by com- mercial policy. Each trade barrier is expected to display a unique protection pattern among industries. The direc- tion of resource flows between industries induced by the combined effective tariff and freight factor rates of protection is expected to be different from that suggested by a comparison of effective tariff rates alone. A second set of calculations compares effective freight factor protection rates enjoyed by U. S. import competing indus- tries with that confronted by U. S. export industries in trade with the nine country European Community (EC) and with Japan. Freight factors place U. S. exporters at a competitive disadvantage in West European markets, as intracontinental trade is not so protected. A final set of effective protection calculations is presented for U. S. processing activities by stage of fabrication. Tariff structures of most industrial nations follow a common pattern. Raw materials enter virtually duty free. Higher tariff rates are charged on intermediate products, still higher rates on semimanufactures, with even higher tariffs on final product imports. This structure gives rise to effective tariff rates on final manufactures which are much higher than nominal rates suggest. The extent to which freight factor inclusion preserves or off- sets the pattern of tariff escalation is explored in this section. Chapter VII employs effective protection calcu- lations to investigate the impact of freight factors and tariffs on the relative factor proportions structure of U. S. production and trade. Although the U. S. is among the most capital abundant countries in the world, Leontief (37) has discovered that a representative bundle of U. S. exports embodied more labor relative to capital than did one of U. S. imports. This conclusion contradicts the familiar Heckscher-Ohlin prOposition that countries will specialize in the production of commodities intensive in their relatively abundant factor. Travis (50) has argued that U. S. nominal tariffs, by restricting relatively labor intensive imports, is responsible for the Leontief "scarce-factor" paradox. Investigations by Basevi (9) and Cheh (16) have not confirmed the existence of a positive relationship between combined effective tariff and non- tariff protection rates, and direct labor use in U. S. import competing industries. The present study tests the nature of the relationship between the theoretically preferred total labor requirements for industry output and combined rates of protection from tariffs and freight factors to determine the impact of these restrictions on the factor proportions structure of U. S. trade. The following chapters examine the determinants of freight factor levels, estimate the magnitude of the barrier imposed by freight factor structure in inter- national trade, and investigate whether this restriction protects labor in U. S. manufacturing activities. All data pertain to the year 1974. Freight charges will have had the opportunity to adjust in response to recent advances in maritime technology, changing competitive conditions, currency realignments, and to major petroleum price increases that occurred in late 1973 and early 1974. More recent data than were previously available are also used to estimate industry input requirements as they would exist in the absence of tariffs and freight charges. Production coefficients are obtained from a 1970 input-output table compiled by the Bureau of Economic Analysis, U. S. Department of Commerce. A discussion of the study's major findings is presented in Chapter VIII. CHAPTER II THE INTERNATIONAL SHIPPING INDUSTRY 2.1 Introduction Ocean transportation charges play a significant role in the activities of international trade by helping to determine which goods enter trade, the volume of freight moving in trade, and which countries will be exporters and which will be importers of a particular commodity. The demand for ocean carriage is a secondary, or derived demand, based not so much on the actual price of ship space, but rather on that price in relation to other factors which are considered when contemplating a foreign trade sale. Additional factors include the f.o.b. (free on board) plant price, the c.i.f. (cost, insurance, freight) price available in the foreign market, delivery schedules, competition frOm other carriers and from other trading nations. If these conditions do not threaten the product's competitive position, and the price of ship carriage is right, the goods will move. Broadly speaking, two distinct categories of ocean transport services are open to the general public, each with a distinct rate structure. In one case, liners offer regularly scheduled service, operate along a spe- cific trade route, and publish their rates. In the other case, tramp shippers provide spot services under charter terms. No fixed rate schedules are involved. Rates for specific shipments are negotiated between the shipper and shipping company. Although liner and tramp rates generally fluctuate in the same direction, liner rates are considerably more stable and less subject to frequent alterations in response to changing demand and supply conditions. If regularly scheduled services are not required, a tramp will usually carry cargo for less. This study is concerned with ocean freight rates charged by liner shipping conferences. Rates are pub- lished for United States trades, held Open for public inspection, and are applied under the supervision of the Federal Maritime Commission. A regular schedule of sail- ings between specified ports is considered to be more important from a marketing standpoint than is the quantity of cargo for a specific sailing. Service dependability combined with a stable rate structure are the major fac- tors distinguishing liner Operations from those of inde- pendent tramps. The liner conference system is one of the oldest institutions of the international ocean transportation industry. Conferences persist as the key means for 10 controlling rates and services in ocean shipping. Approxi- mately 380 conferences are currently in Operation world- wide. One third Of these control commodity movements over major trade routes, while 40 percent operate on routes Of lesser importance, with the remaining associations serving local trades.1 The majority of cargo carriers and ship- pers whom they serve continue to prefer the conference system over alternative modes of operation. In this chap- ter, conference Operating methods are reviewed, with special emphasis placed on their rate-setting procedure. 2.2 Shipping Conferences A conference is an association on liner companies, Operating along a distinct trade route on the basis of a fixed schedule with a written agreement requiring that all members charge identical freight rates. Conferences coordinate sailing schedules of their members, assign ports of call, berthing, handle complaints, monitor business practices in the trade and impose penalties upon errant members. The associations undertake to fix traffic shares but usually refrain from apportioning revenues, profits, or specific cargoes and customers along member lines.2 A conference is involved with cargo movement in 1A summary of conference operations is presented in Lawrence (36). 2See Lawrence (36, p. 17). 11 only one direction along a route. Liner companies operat- ing in one direction may or may not return along the same route. Thus liner companies frequently hold membership in several associations. Although conferences have mem- bers in common, the cargo, facilities, and methods involved in trade in one direction along a route may differ substantially from the other direction. Each con- ference develops its own highly complex rate structure involving literally thousands of commodity classifica- tions. The conference system evolved in reaction to "cut- throat"competition prevailing among shipping lines during the 19th century. In liner shipping, direct out-of- pocket costs associated with carrying an additional cargo ton are but a small fraction Of the average costs which must be covered in order to make the service viable over the long run. Groups of shipowners interested in cargo flows along specific routes soon discovered an incentive to COOperate in administering a uniform pricing system to check the competitive urge to secure any revenue yielding a margin over out-Of-pocket costs before fully allocated costs of the sailing schedule are recovered. Since iden- tical rates are charged by all member lines, the confer- ence forms a type of international cartel. Members argue that the purpose of a conference is to stabilize the 12 conditions of trade by Offering to shippers a dependable schedule of sailings at a uniform rate. Conferences have drawn criticism for maintaining excess capacity, charging rates designed to meet the needs of their highest cost members and for fostering price disparities out Of line with cost of service criteria. Yet, liner conferences remain international bodies, and maritime nations exercise little control over conference policy. 2.3 Government Review of Shipping Conferences The international character of liner associations insulates them from overt national control. Conference activities are usually not tied to national manufacturing sectors. In the United States, conferences are specifi- cally authorized by the Shipping Act Of 1916. The act exempts them from antitrust legislation. It permits the formation of shipping conferences for the purpose of establishing and enforcing rules and rates, requiring only that they be published. The Act also creates what is now the Federal Maritime Commission (FMC) with powers to disapprove rates found to be detrimental to U. S. conunerce . 3 3A history of United States shipping legislation may be found in Hazard (26, pp. 318-24). l3 Maritime nations typically refrain from regulat- ing activities of liner conferences. The FMC is the most active of any governmental agency in its efforts to review and influence conference policies. Japan and the West European nations regard actions of the FMC to secure revenue and cost information from all national flags as an intrusion Of foreign authority over their trade. Recently, competitive pressures from Soviet lines have begun to disrupt conference operations in some areas of the world. The European Community (EC) is moving toward rate regulation, schedule registration and the establish- ment Of quotas on sailings to and from EC ports.4 Over the years, national organizations have not reached an agreement as to the proper relationship between governments and conferences. Shipping associations con- tinue to be free from direct government control. As a result, the rate setting practices of liner conferences have remained virtually unaltered for almost a century. The following section develops a theoretical foundation for the structure of liner freight rates; that is, the factors which account for commodity rate differences. 4"Shipping: EC Nations Fight Communist Tactics," Business Week 12 December 1977, p. 69. 14 2.4 _Conference Rate Making-— Theoretical Analysis Liner conferences are characterized by complex multiple pricing systems. The reason for this is the voyage cost structure. Once a shipping schedule is set, most costs become fixed; and fixed costs are common to all commodities carried. There is no satisfactory way to allocate fixed costs between units of heterogeneous commodities. Shipping services also entail joint costs, as the supply of outbound carriage leads to the supply Of inbound carriage as well. Over the years, conferences have attempted to allocate costs by assigning individual commodities a rate in accordance with well established service cost and demand criteria. Most theoretical explanations of the rate-making process are based on the premise that a conference rate schedule reflects cost and value Of service factors and that it is consistent with competitive conditions prevailing on each shipping route. One factor accounting for variations in freight rates on individual commodities is the stowage factor, or the number Of cubic feet of ship space occupied by one long ton of each item. The commodity stowage factor, as a supply determinant, influences the cost of producing transport service. Cargo density is important to ship Operators because the capacity Of a ship was two con- straints--the deadweight capacity and volume capacity. Most liner cargo is of low density so the stowage factor 15 is used as an index of the amount of cargo which must share the common cost Of vessel Operation.5 The Oppor- tunity cost of accepting a commodity which stores at 80 cubic feet per ton will be twice that of one occupying 40 cubic feet. Alternatively stated, the elasticity of voyage costs with respect to the stowage factor is unity. A frequently employed rule is that one long ton Of cargo equals 40 cubic feet Of ship capacity. This is known as a stowage factor of l in liner trades. The rate making scheme presumes that commodities with a stowage factor less than 1 do not incur volume costs. These commodities are assigned a rate according to shipment weight, regardless Of the space they occupy. Commodities which store at more than 40 cubic feet per long ton are rated according to density as dictated by their stowage factor. Whether rated on a weight ton basis or on a measurement ton basis (40 cubic feet per long ton), the charges assigned to individual commodities are intended to reflect differences in actual cargo density. It is, therefore, reasonable to expect rates charged on indi- vidual commodities will be an increasing function of their stowage factor. 5The relative importance of low density cargo is discussed in Heaver (28, p. 17). 16 Unit value is a second factor held responsible for commodity differentiated rates. It enters the rate determination process on the demand side. In a perfectly competitive market, fully allocable liner costs would entirely account for the structure of freight rates. However, liner conferences are cartels. Members behave as discriminating monopolists. Rates are expected to deviate from costs according to what "the traffic will bear." It is common practice to use commodity unit value as an index of the relative rate elasticity of demand for shipping service. The reasoning is as follows. If one commodity is more expensive relative to another, a given increase in the transport charge will add less in per— centage terms to its price than to that of the expensive product. If both commodities face the same import demand elasticity, both sales and the purchase of shipping ser- vice will decline less for the high value commodity. A lower elasticity of derived demand for shipping service will be associated with the relatively expensive product and it will in turn bear a higher freight charge. This practice represents the least cost method for obtaining estimates on shipping demand elasticities. One would expect rates charged on individual commodities to be an increasing function Of their unit values. 17 A number Of additional factors commonly held to be liner rate determinants are conveniently lumped into the category of competitive pressures from alternative means Of transport. When individual commodities move in large quantities and a fixed delivery schedule is not required, competition from independent tramps and tankers is expected to influence the demand for liner service. Com— petition on the route may limit the extent to which con- ference rates can deviate from costs according to what the traffic will bear. It is reasonable to expect that con- ferences grant lower rates for commodities which move in large quantities. When large physical quantities are involved, it may be possible to use tramp shipping. Large annual cargo movements also imply security of revenue for the conference which is likely to be reflected in a low conference rate. Liner conferences are alleged to main- tain low rates on commodities which are prone to tramp/ charter competition to prevent these outsiders from Obtain- ing a foothold and subsequently gaining entry into the more profitable part of liner business. However, the importance of deterrent pricing as an explanation of con- ference rate making behavior has been questioned by Jansson (29). It is unlikely that conference members would persist in carrying low rated commodities simply to deter potential competition when liner company's profits are modest anyway. 18 2.5 Conclusions Liner conferences hold a position of prominence in the international shipping industry. This fact is important from a research standpoint for a number of reasons. First, liner conference rate schedules appli- cable to United States trades are maintained on file at the Federal Maritime Commission. They are held Open for public inspection and comprise the most extensive sets Of transport charge data currently available.6 Rates are arranged according to the S.I.T.C. (Standard International Trade) or the B.T.N. (Brussels Tariff Nomenclature) clas- sifications at various levels of aggregation. A direct comparison can be drawn between rates and commodity trade data. Second, liner rates are considerably more stable than are tramp rates. Commodity rates are based in part on product unit value. The liner freight rate and U. S. import value indices move in the same direction. As a result, the ratio of transport charge to unit value for most commodities remain relatively constant over time. Finally, each conference Operates along a specific trade route and data are available on commodity movement by 6A survey of international trade and transporta- tion literature indicates that the availability of such data is not widely known. Most studies employ c.i.f./ f.o.b. ratios from actual trade statistics to approximate transport charges for individual items. A discussion of measurement errors encountered in c.i.f./f.o.b. calcula- tions may be found in Bhagwati (12). 19 trade route. Chapter III offers an empirical assessment of conference rate-making behavior. CHAPTER III EMPIRICAL VERIFICATION OF THE CONFERENCE RATE-MAKING PROCESS 3.1 Introduction This chapter examines empirically the commodity structure of ocean liner freight rates; the relationship between commodity characteristics and the rates charged for shipping them. Several previous empirical studies have attempted to show that liner rates can be system- atically explained by cost and demand factors. All but one study found the most important single factor account— ing for variations in freight rates on individual commodi- ties tO be the stowage factor, a measure of costs. The role Of unit value as a demand factor in the rate deter- mination process was discovered to be of secondary importance.1 This study represents the first attempt to assess the impact on liner rates of tramp and tanker competition along specific trade routes. In addition, 1See, for example, United Nations Conference on Trade and Development (54), Heaver (27, 28), Carman (15), Bryan (14), and Shneerson (47). Lipsey and Weiss (40) identified unit value as the most important rate deter- minant. However, stowage effects were probably aggre- gated away in the 3-digit S.I.T.C. investigation. 20 21 the stowage factor-rate relationship is examined sepa- rately for high density and low density cargo. 3.2 The Freight Rate Estimating Equation The basic estimating equation is as follows: FR where: FR ST DST LT DTRA DTA f = aVbSTC[(ST-4O)X DSTJdLTeDTRA DTAg (3-1) is the freight rate per long ton (S per 2240 pounts) is value per long ton is the stowage factor (cubic feet per long ton) is a density dummy variable permitting slopes to vary above and below 40 cubic feet per long ton is the number of long tons of each product carried annually by conference members is a dummy variable for cargo shipped on tramps is a dummy variable indicating tanker cargo movements. The log-linear functional form was chosen to reflect the asympotic nature of freight rates with respect to unit values.2 Unit value represents an index of the relative rate elasticity of demand for transport service. Rela— tively expensive commodities are better able to bear 2A linear form was also tested. Results of the log form.were superior. 22 high transport charges as the rate will add less in per- centage terms to its price than to the price of inexpen— sive products. Conferences are discriminating monopolists and higher rates can be expected on high value products than on low value products. If liner conference rates are based primarily on "what the traffic will bear,” unit value will be the most important rate setting factor. Cargo density, as reflected in the stowage factor, constitutes the major cost based rate determinant. Most liner cargo is of low density so the stowage factor represents an index of the amount of cargo which must share the common costs of vessel Operation. It is reason- able to expect that commodities with large stowage factors will incur relatively higher rates. In liner trades the concensus appears to be that commodities with stowage factors less than 40 cubic feet per long ton do not incur volume costs. Rates are assessed on a weight basis irrespective of the volume of cargo space they occupy. Low density commodities (occupying more than 40 cubic feet per long ton) pay according to their stowage factors. High density com- modities and low density commodities are therefore expected to exhibit different stowage factor/rate rela- tionships. This hypothesis is tested by employing dummy variable DST which permits the equation's slope to vary 23 above and below the crucial stowage factor value. If the coefficient on DST is found to be statistically signifi- cant, the estimating equation without DST will be tested on high and low density cargo data separately. The remaining explanatory variables are intended to capture the influence on liner rate levels of compe- tition from other modes of transport. Conferences are believed to charge lower rates on commodities which move in large quantities to discourage competition from tramps. It is also reasonable to expect lower rates on all commodity movements capable Of being shipped by tramp or tanker. Each conference Operates along a distinct trade route in only one direction. Conference membership, cargo capacity, methods of Operation, and competitive condi- tions may vary substantially in Opposite directions along the same route. Data are not available to expand the model to encompass every variable which might have an influence on freight rates. It is, therefore, necessary to test the basic estimating equation on data pertaining to each separate route direction. 3.3 Data and Methodology The equation was fitted by ordinary least squares to data pertaining to inbound and outbound legs Of two "essential” United States foreign trade routes. Essential 24 foreign trade routes are those determined by the Maritime Administration to be essential for the promotion, develop- ment, expansion and maintenance of U. S. foreign commerce. Actual route patterns were identified with the aid of a recent Maritime Administration publication (66). The report contains data on the relative importance of each route in U. S. commerce. Trade route No. 5-7-8-9 covers 38 percent of liner exports and over 50 percent of liner imports in the North Atlantic/Western Europe trade. Over half the liner exports and 45 percent Of the liner imports involved in the U. S. Pacific/Far East trade are accounted for by trade route No. 29. Conferences Operating along each route leg were identified with the help Of Federal Maritime Commission Officials and from information con- tained in (43). Contract rates on traded commodities were obtained from liner conference rate schedules maintained on file at the Federal Maritime Commission.3 Unit values were computed from United States trade statistics, and like rate data, were converted to a long ton basis. All values are expressed in U. 8. dollars and pertain to the year 1974. Stowage factor tables for U. S. exports and 3Contract rates apply to shippers who agree to send cargo exclusively within the conference for a par- ticular length Of time. They are generally 10 to 15 per- cent lower than noncontract rates. NO allowance can be made for rebates (which are illegal in the United States) or for other deviations from the published rate schedule. 25 imports are contained in Leeming (37).4 Tonnage data on commodities carried by liners, tramps, and tankers over specified trade routes were Obtained from Maritime Admin- istration Report Number CMA 012P02, Commodity Shipments by Trade Route and Type Of Service, 1974. Data are com- piled under the 4-digit Schedule A code for U. S. imports and under Schedule B for U. S. exports. 3.4 Regression Results Regression results are summarized in Table 3.1. Coefficients on the stowage factor and unit value vari— ables are statistically significant at the 5 percent level for the majority of cases. Conference members are found to behave as discriminating monopolists in charging "what the traffic will bear," but the most important factor in explaining variations in freight rates on individual commodities is the stowage factor, a measure of service cost. The high levels of explanation of rates achieved by multiple regression analysis constitute one of the most striking results of this investigation. Data are 4Tables contain stowage factors as computed from actual weights and measurements of commodities packed for shipment. NO allowance is made for broken stowage. Stowage factors for U. S. exports and imports are recorded separately in Leeming (37), as variations exist between packing methods at U. S. and foreign ports. Additional stowage factor tables are contained in Ford (21), Thomas (49), and Garoche (22). Weight/volume conversion tables are contained in Martin (42). 26 .Ho>OH unmoumm on oz» um acuOfluacmHmce .Hw>ma unwoumm m mnu um unmoauwcmwmc .mOaumflumumuu ucmmoumou mammnucoumm :w mouamwh Ams.H. .Ho.~c .vo.-c .. .mm.HH. Amn.m. oe A em mH.mv on. Am. ..moH. Aged. Hoo.a .. .meo.H «Nma. nHo.u «o Oceanuso 1mm.-. 1H0.-. 1mm.-. -u .mo.~. A~v.m. cc v em cm.~ om. mm. mma.a mmo.u o~o.- n- .Hnw. who. mam.n ha oesonuso .mm.. .mH.H. .em.n. Aoo.~. Amo.~C Aom.n. No.m~ mm. mo. emo. OOH. NHO.- .NNH. «mam. emvu. ~mm.~ an unsonuao Amv.uc xvo.c lewd.-. u: .mv.-. .mp.m. ow A em mo.oe we. no. Hoo.u Moo. H~o.u u- coco. «med. HH~.: oo Ocuoncn 1mm.c 1cm.. 1mm.. Ave.-v .Hd.n. ov v em ~m.m mo. om. ham. mod. «NO. in ego.u cued. ovo.~ om Ocaonea .Om.. .mm.~. 15m.-. .oo.m. .m~.~. .me.m. no.0m mm. mm. mmo. ..om~. m~o.u .mvd. .na~. .mmw. H~>.a mm unschca Mm 1v~.. 1H6.-. .mm.a. u- loo.O. AOH.H. ov A em mm.od em. mm. . «no. meo.u «no. I- .vmm. mmo. men.~ no ccsonuno on.~. .mo.-. .mo.. u- Ade.-. .Nm.~. ov v em mm.m Ho. om. .omm. m-.n coo. u- «mo.n cqwd. pwm.n ma ucaonuao lmv.. 1mm.-e 1H~.H-. .co.~. .ma.~v .mm.~. oo.m~ me. om. sec. ooo.- Hmo.u amo. .wa. «.Aeo. ~om.m om unsonuao .Hm.. .vH.. 1am.-. nu 1mm.m. xoa.H. ov A em q~.oH Hm. me. oHH. mHo. m~o.u In .mp0. «.Hmo. som.a mo canonca loo.-c lad.-. .mw.-. u- .em.. .ho.. cc v am am. no. mm. oe~.u omo.u m~c.- I. owe. Ono. vom.m AH ucsoncn Amn.. 1mm.. .mn.- . .o~.c Asm.av Ans.~. mm.oH mm. we. mmo. oeo. mmo.- «no. «.mvv «veg. noo.~ om vcaoncn Onouhum am new macaum>uwmao I . 9 m mm Hmeuumm mm ago unuuwcoo mo awnssz on on ‘4.”IH mufismmm :Ofimmouomm "nodumsvm unauoawumm mama unmaouhlu.d.n Hands 27 not available include a wide variety of the variables commonly held to be rate determinants.5 An index of the relative contribution of product bulk in explaining freight rate dispersion along each route leg is Obtained by calculating a partial R2 for the stowage factor variable(s) in each equation. Results are displayed in the table. As expected, low density products exhibit a widely different stowage factor/rate relation- ship than do high density products. The stowage factor is found to exert a strong influence in the rate deter— mination process for bulky items, but enters significantly in only one instance when high density products are con— sidered. Rates assigned by conferences to individual commodities are intended to reflect differences in actual cargo density, regardless of whether items are rated on a weight ton or a measurement ton basis. The opportunity cost Of accepting a commodity which stows at 20 cubic feet per long ton should still be twice that of one stow- ing at 10 cubic feet per long ton. Since the stowage factor variable does not figure significantly in the rate determination process for high density products in most of the cases under study, it appears that commodities 5Bryan (14) lists 27 factors believed to enter the rate setting process. These include susceptibility to pilferage, fragility, heavy lifts, extra lengths, insur- ance, and lighterage (requirement that items be unloaded offshore via barge). 28 occupying less than 40 cubic feet per long ton are assessed rates which do not reflect their Opportunity cost. A limited number of commodities actually fall into this category. Items of major importance include iron, steel and nonferrous metal primary shapes and manufac- tures. The magnitude of the coefficients on the stowage variable for low density products displays only minor variations on inbound and outbound legs of the same route, but is Observed to differ substantially across routes. Shipping economists interpret this result to indicate the presence of similar degrees of excess capacity along each leg of the same route. Relatively more excess capacity is expected along the route dis- playing lower values for the stowage factor coefficient. The importance of the stowage factor variable in explain- ing rate dispersions is also expected to increase as ship capacity limits are approached.6 Results suggest that competition from tramps and tankers does not influence the level of liner rates. Marx (43) and Heaver (28) were the first to suggest that tramps afford liners with only limited competition. Con- ferences do not appear to grant lower rates for commod— ities which move in large quantities to discourage their 6See, for example, Heaver (28). 29 shipment by tramps.7 Coefficients on dummy variables representing cargo carried by tramps and tankers are statistically significant in only three cases, and even then are positive. If this result is taken at face value, it suggests cargo movements common to all three service types incur higher rates when shipped by liners. Service dependability and a stable rate structure are likely to be responsible for these items being carried on liners when less expensive services are available. 3.5 Discriminatory Ocean Freight Rates: Empirical Investigation In hearings before Congressional committees during the early sixties, the Joint Economic Committee advanced the theory that liner conferences on certain routes were unjustly discriminating against United States eXporters.8 These conferences were alleged to do so by charging on the average in all U. S. trades, as well as on identical cargo movements in both directions, higher rates on 7Statistical results do not differ when total value or total volume are used as an index for liner cargo movements. 8U. S. Congress, Joint Economic Committee. Digs criminatory Ocean Freight Rates and the Balance of Pay- ments, 88th Congress, lst and 2nd sess., parts 1 through 5, June 20 and 21, 1963, October 9 and 10, 1963, Novem— ber 19 and 20, 1963, and March 25 and 26, 1964; and 89th Congress, lst sess., parts 1, 2, and 3, April 7 and 8, 1965, May 7, 1965, June 20, 1965. 30 outbound than on inbound shipments.9 Ocean freight rate disparities were held to pose a significant barrier against U. S. export trade. An additional penalty was assessed against U. S. exporters as most foreign tariffs and consumption taxes are applied on a c.i.f. basis. Several investigations were undertaken by various research organizations to test allegations that exorbitant rates on U. S. exports were subsidizing exports to this country. United States Government studies determined that on trades between the U. S. Pacific and the Far East, between U. S. Atlantic and Gulf ports and the Far East, as well as on cargo movements in the Atlantic coast/ Western Europe trade, freight rates on American exports exceeded rates on corresponding imports for the majority Of items sampled. Conferences acknowledged these dis- parities, but argued that the prevailing rate structures were consistent with commodity and route characteristics in these trades. Definite conclusions about discrimination could not be reached in the absence of a consistent theory on liner shipping Operations. The only clear-cut case of unjust freight rate discrimination occurs when one exporter Of a product is charged a higher rate than 9A summary of the issues involved may be found in E. Bennathan and A. A. Walters (ll). 31 another exporter of the same good on the same route leg. Problems arose in attempts to determine whether or not a general diSparity of rates existed inbound and outbound along the same route. Cargo characteristics, volume, ship capacity, facilities, Operating methods, conference membership, and competitive conditions involved in trade in one direction may differ widely from the other. In light of this, it is not surprising that the Federal Maritime Commission settled for the less ambitious task of comparing rates on individual commodities which move in both directions on a route. The end result of many years of investigation was to identify seven outbound rates on commodities of minor importance as being so unreasonably high as to be detrimental to U. S. commerce. Yet, United States producers and exporters continue to voice complaints that discriminatory rates are weakening their competitive position abroad, while enhancing the competitive strength of foreign suppliers in the home market. Sixty-one such complaints are documented in a recent U. S. Tariff Commission survey of non-tariff barriers (68). Table 3.2 identifies rates on identical commodi- ties moving inbound and outbound along Trade Route NO. 29 (Far East/U. S. Pacific Ports), and Route NO. 5-7-8-9 (U. S. North Atlantic/Western Europe). Route patterns 32 AAA A AANN AAA AAAA AA NNAA AAA AxooA ANAA AAAAN A AAAN NAN AANAA AA AAAN AAN AAAoAnA> uouoz ANAA AANA AN AAoN ANA AAAAA AA AoNN AoA AuchsoAs AmoAuuooAA AANA AAA A AAAN AAA AAoA A AAAN AAA AAAuoouAA AANA ANAAA N AAAA AA AAANA A AAAA AA AAAAou no AAAn .AAAANAAA AAAA AAA A AAoA ANA AAAAA A ANoA AAN AocAnums AcAsom AAAA NAAA A AANA AAA oAAAA A AAAA AAA :oAumsnsoo AmcumocA .mosAmcm AAAA NAN A AAAN AA AAANA A AAA AA Ammum no couA .Ausc .AAAoA NAAA AAA AN AAAA NAA AAA AA AAA AAA Auchmucoo AAAA: NNAA AAAN A AAoA AAA AAAA A AAAN AA .u: .AaoAAA AAA uummou NNAA AAAA AA AAA AA A A AAA AA onus .AAAA :oAA ammo AAAA AAAA AA AAN AA ANAAA AN AAA AA AAAAA AAAAA uo couA AAAA AAAA AN oAA AA AAAA AA AAA AA mumAche AAAA oAAN NN AAA oA AAAAN AA AAN AA AAAAAA AAAAA no couA AAAA AoA AA AAA AA AAAAA AA AAA oA AAAAAA AAAAA uo :oAA AAAA AAAA AN AAA AA NAA AA AAN AA moon AAA: AAAAA No couA AAAA NN AN AAA AAA AAAA AA AAN AA onuozas .umao .AAAAO AAAA AA A AAAA AAN AAAA AA AAAAA AAN AAAAuoo .chze AAAA AA A AAoA AAA AA A ANNA AAN Aooz .cum» NAAA AA AA AAAA AAA NA AA AAAA AAN AAAAoAAAAA NAAA AoAAA AN AAA AAA AAA AA AAA AAA oumonuwmum AAAA AAA AA AAA AA ooNAA A AAA AA ooossAA NAAA AAA A AANA AAA AA N NAAA AoN mammocmm AAAA AAAA A AAAA ANA AAA A NNNN NNA AAAAA AAAA voAN AA AAN AAA AN AA AAA AA AAo AcAomoAunsa ANAA AAN AA AAA AAA AA AA AAA AA ooAqusu asAooA AAAN AAAA AA AAA AAA AAAAA AA NAA NAA oAAAAA:AA .uwnnzm NAAN NAA NA AAA NA oNAA AN NAA AAA Aoauu .uonoqm AAAN AAAA AA AoN AAA AAA oA AAN AA Noon .AAA ANAA AAA A oAAN ANA AAAN oA AAoA AAA AAA AAAA voA AA AAA oA AAAAN AA NAA oA coAuc .AoAnAuAAo> AAAo AAA AN AAAA ooA AAAA AN AAAA AAA monsooum auoxum AAAo womccoa ovum Osam> mama panacea mumm OOHO> oumm uAcAA EANoAA> o4 uAca HocAA smqum> AA AAA: Avooasoo coco A no ocsoouso AnsoncA A AAaoocuA AAAoO oAAAoAA .A .:\AAAA AAA AN .02 AAAOA 1.1 mousom opens :oAONOE mmumum wouwca ccsonuso can ccsoncH pmuokom :o mmumm unofioumla.m.m manta .AAAA AAAA an» on :Amuuwm moan AAA .wcou OCOH CA pousmmms AA wmmccou HOCAA .33 .A.mnA ovmmv so» chA non mumAAOO .m .3 CA mousmcms mum mmsAm> uacs can mwumm “maoz AAAAN AA AAAN AAN AAAAA oA ANAN AAN AAAoAnw> uouoz ANAA AAANA A.o AAAAN AA AA A.o AAoNN AA moon» couquAm AANA AAA N AAAAA AAN AAA N AAANA AAN AAA>AAoAu oAAmA NANA AAAA A AAAA AAA AANA N AAAA oAA Ahchnoms ummmm .AAAA AAAA AAA A AAAA AAA AAAA A AAoA AAN AocAser AAAAAA AAAA AAAA A AAAA AAA ooAAN N AAoA ANA mocAnoms AAAuer AAAA AAAN A AAAN AAA AAoA A AAAN AA AuocAAoAs AchAoaAAumz NAAA AAN A oAAAA AAA NooA A AAAAA ooA mchgoms AcAumAsoAAo NAAA NANA N AAANA AAN AAAA A AAoAA AAA ANAAAusomAe AAAA AAAAN A AAAA AoA AAAAA A AoAA AoA :oAumnneoo AmcuoucA .AAAAAAA AAAA AAA A AAAA AAA AAAAA A AAAA ANA AAAuouAm .AAAAAAA AAAA AAAA N AAAA AA AAAAN A AAAN AA .Aa .AAoAAA can nommoo NNAA AAAAA A AAAA AA AAAAN A AANA AA .uzcs .AAoAAA new uoamoo ANAA AANAN NA AAA AA AAAN A AAA AA oumonuommm AAAA AAAoN A AAAA AA AAAA A AAAA NA AAAAA AcAuAus .AcAucAuA NAAA AAA AN AAA AA NAA AA AAA AA AoosaAA NAAA AA AA AAN AA AAAAA NA AAN NA moumnmAsm NAAA AAAA NA AAA AA NAAAN AA AAA AA AAAxo AAAAz AAAA AAAA AN AAN AA AAAA AN AAA NA AvoA oAcmmuocA AAAA oAAA A AAAA AAA AAA A AAAN AAA AAAAA ANAN A A AAAN AAA AAA A AAAA NA AAAAAA .Aooz ANAN AAAN NA ANA AA AAAA AA AAA AAA oAuozu:AA .umnozm NAAN NAA A ANAA AA AAA A AANA AoA Amco: AAAo AA AA AAA NA oAAN AA AAA NA ummsm AAAo AAA AA ANA AA AAAA AA NAA AA AAAcAocoo .xAAz ANNA OOACCOB oumm osAm> oumm ocmccoe mama ma~m> mumm AocAA EOAOAA> p4 uAc: AOCAA Eouoam> pd awn: Aquossoo wooo A no ocsoooso ocsoncA A AAsomcoA OQOASE :AOuw03\OAuccau< .m .3 anmnhum .02 usom AoscAucoo--.N.A AAAAA 34 are displayed in Figures 3.1 and 3.2. Commodity unit values, the ad valorem rate and liner tonnage are pre- sented in Table 3.2. A comparison of the data pertaining to Route No. 29 confirms the existence Of a general out- bound rate disparity which cannot be explained in terms of differences in commodity unit values or liner tonnage. Higher rates are Observed for outbound commodity movements in twenty-two of the thirty-two cases. Larger outbound commodity movements are associated with one third Of these commodities. The rate differences are large, ranging from 2 percent to well over 100 percent. The largest outbound rate disparities are Observed for cast glass, tinplate, cast iron pipe, wool yarn, bolts and nuts, engines, COpper products, beer, iron and steel wire rods, lubricat- ing Oil, plywood and stationary. Ad valorem rates are higher for outbound commodity movements in nineteen of the thirty-two cases. These differences range between 1 per- cent and 26 percent, and are largest for beer, sodium chloride, tinplate, cast glass and iron and steel plate. The outbound rate disparity in the U. S. Atlantic/ Western Europe Trade (Route NO. 5-7-8-9) is not so severe. Higher rates are associated with outbound commodity flows in seventeen of the twenty-five cases. The rate differ- ences range from 1 to 85 percent, being largest for wool, calculating machines, typewriters, sewing machines, and 35 .muuom mewomm .w .=\ummm Mom .mm .02 musom mcmuaul.a.m wusmwm mwhdhm 09:23 (.418bm31 (.md 36 .mmousm cumumw3\oAu:mAu< nuuoz .m .D mlmlhlm .Oz musom mcmusll.m.m musmfim 0" W 3.0.1:. 1.. 00...... x di' then Ej > dj > di (4-7) If d. = d., then B. = d. = d j 1 j 1 1 If d. < d., then E. < d. < d. J l J J 1 n If d. < Z ai'di' then E. < 0 (negative effec- 3 i=1 3 3 tive protection) Equation (4-6) can be decomposed to illustrate the dual tax subsidy influence of freight factor structure. n 2 a..d. d. . 13 1 _ 11 1=1 _ E. — --——————-— S. - T. 4-8 3 n n J J ( ) l - 2 ai. 1 - 2 ai. i=1 3 i=1 3 Sj represents the gross subsidization rate per unit value added accorded to process j by nominal freight factors imposed on imports of the jth commodity. Tj may be interpreted as the implicit tax rate per unit value added in the jth production process resulting from nominal freight factors on imported inputs to that process. Nega- tive effective protection rates will result when the tax element resulting from nominal freight factors on imported 48 inputs exceeds the subsidy permitted by such rates on the output of process j. 4.3 Freight FactorlTariff Structure Interaction Under Alternative Valuation Bases Thus far, this chapter has been concerned with the concept of effective protection as it relates to freight factor structure in the absence of tariffs. Freight factor and tariff structures interact to deter- mine the combined level of protection accorded to each U. S. import competing industry. To assess this conse- quence for the structure of U. S. production and trade, tariff protection will be considered in conjunction with protection from freight factors. It will also be of interest to estimate the mag- nitude of the barrier imposed against U. S. export indus- tries by the combined tariff and freight factor structure Of other nations. The two trade impediments differ sub- stantially in application. While tariff rates, aside from preferential agreements, apply equally to all importers, freight factors are known to vary with the geographical pattern Of trade. One distinguishing char— acteristic of international trade is the existence of freight factors exceeding those associated with inland commodity movements, particularly for intercontinental trade. For example, international freight factors are 49 expected to place U. S. export industries at a competitive disadvantage in trade with Western EurOpe, as intra- EurOpean trade is not so protected. One goal of this study is to calculate rates Of effective freight factor and tariff protection for a representative sample of U. S. export and import industries in trade with the European Community and with Japan. In preparation for this under- taking, it will be necessary Usexamine the manner in which tariff and freight factor structures interact to determine the combined level Of effective protection under alterna- tive customs valuation bases. There are two major customs valuation bases: the f.o.b. price and the c.i.f. price. The former stands for free-on-board and represents the price of the commodity on board ship at the port of exportation. The latter designation stands for cost-insurance-freight and repre- sents the commodity's value at the port of importation. It includes freight, insurance and other charges incurred in transporting the merchandise from the port of exporta- tion and generally placing the item alongside ship at the port of entry. When tariffs are levied on f.o.b. value as in the United States, the combined effective protection rate (Zj), is expressed as the sum of the rate Of effec- tive tariff and effective freight factor protection. European nations and Japan calculate tariffs on c.i.f. 50 value which includes the cost Of freight and insurance. The corresponding level Of effective protection (25) is not just the simple sum of effective tariff and effective freight factor rates Of protection. This sum is augmented by a term representing tariffs levied on the freight fac- tor component Of total landed value. These alternatives are illustrated in equations (4—9) and (4-10). n n [u+d.+tJ- Zafll+d+¢gk-u- ZaTJ] _ 3 3 i=1 13 1 1 i=1 1 Zj - n (1 - Z {-) i=1 3 n (dj + tj) - .E aij(di + ti) (4_9) _ 1—1 - n (l-— X a?) i=1 13 n n Hl+dJ(1+tJ- £a.Jl+dJ(1+tQ-(1- zafhl z' = 3 3' i=1 13 1 i=1 13 j n (l- 2 a73 i=1 13 n (d. + t.) - 2 aff(di + ti) _ 3 3 i=1 13 _ n ’ (l- X ai” i=1 3 n djtj - Z aggditi + 1:1 (4-10) n U.- Z 5:) i= 13 51 Nominal tariffs on output j and input 1 are represented by tj and ti' Value of the input of factor i per dollar value Of output j in the absence of freight factors and tariffs (the free-trade-frictionless world case) is denoted by aij’ and a1} in equations (4—9) and (4-10) respectively. A final modification is required before these equations are employed in calculations of effective freight factor and tariff rates of protection. The (aij*'s) Observed from the United States input-output table are distorted by tariffs and freight factors. To approximate free-trade-frictionless input shares called for in the above equations, the Observed input output coefficients are deflated by freight factors and tariffs on imports of final products and inputs. The following formula is used for the f.o.b. valuation system adjust~ ment: I = * aij aij [(1 + dj + tj)/(l + di + ti)] Under the c.i.f. valuation basis the formula becomes: I I = * V aij a ij[(1 + dj)(l + tj)/(l + di)(1 + ti)] Equations (4-9) and (4-10) differ in one major respect. An interaction term for tariffs levied on the freight factor component of imported final product and 52 input landed value is included in equation (4-10). If freight factors were equal for all imports, combined effective protection rates would be greater in absolute value for the same structure of tariffs under the c.i.f. valuation base than for the f.o.b. system. The differ- ence is entirely attributed to the levying of tariff charges on the freight factor component of total landed value under the c.i.f. valuation basis. Johnson (30) derives one additional implication from the different pattern Of tariff and freight factor interaction exhibited under alternative valuation bases.3 When freight factors are included in the analysis, each valuation base holds a different implication for the allocative efficiency of world resources in production under tariffs. If protection from foreign competition is accepted as legitimate, the levying of tariffs on a c.i.f. basis tends to equalize marginal costs among competing sources of imports, whereas the f.o.b. valuation system subsidizes goods produced at a greater distance as com- pared with goods produced near by when both have the same total landed cost. The analysis proceeds as follows. Define units of an imported commodity such that its price in a 3The following presentation parallels that of Johnson, the major difference being transport charges are expressed here in ad valorem terms, rather than as a specific duty. 53 particular tariff imposing country is unity. Let dA and dB represent freight factors incurred by the import from two alternative sources of foreign supply. Differences in freight factors are assumed to reflect differences in the real cost Of transport service, free of distortion from monOpolistic pricing practices. They are also assumed to vary monotonically with distance. CA and CB are defined as the level of costs which must be achieved for exports from each foreign supply source to be competi- tive with domestic production in the tariff imposing country. A tariff is levied at rate t alternatively on the c.i.f. value and the f.o.b. price. Under the former system we have 1 = C (l + dA)(1 + t) = C A (1 + dB)(1 + t) B or (1 + dB) CA = C (1 + dA) B Landed costs of the two imported goods must be equal in the tariff imposing country's market. CA and CB must reflect the true difference between dA and dB in order for both to be competitive with domestic production in the tariff imposing country's market. Requirements of efficient production for this market are satisfied by 54 foreign suppliers. (Pareto conditions regarding resource allocations between foreign and domestic sources are violated by the tariff, which is assumed to be justified by externality conditions in the tariff imposing nation). Under the f.o.b. valuation system we have 1 = cA(1 + dA + t) = cB(1 + dB + t) CA(1 + dA + t) = CB(1 + dB + t) or CA=-:—;—-;—§:—:—CB+1—§—a-A—(CB—CA) Table 4.1 illustrates the production cost advan- tage awarded the more distant country A under the f.o.b. custome valuation system. Goods from country A may cost more to produce and transport [CA(l + dA)]' and still compete in the tariff protected market with goods from the less distant country B. The frieght factor component Of total landed value reflects real cost differences in the provision of transport service, but escapes the tar- iff. Country A's production cost advantage is Observed to diminish as the difference between dA and 6B is reduced. When tariffs are applied on f.o.b. import value, the net effect is to promote an inefficient allocation of produc- tion among alternative foreign sources of supply. 55 oo.A AA.A AAA.A AAA.A Ao.o AA.A AA.o AAA.A AAA.A A oo.A oo.A AAA.A AAA.A Ao.o AA.A oN.o AAA.A AAA.A A AA.A oo.A AAA.A NAA.A Ao.o AA.o AA.A AAA.A AAA.A A AA.A oo.A AAA.o AAA.A Ao.o AA.A AA.A AAA.A AAA.A N oo.A oo.A AAA.A AAA.A AA.A AA.A AA.A AAA.A AAA.o A AA+AA+A1AO Au+AA+ACAO AAA+ACAO 14A+A1Ao A. AA AA AA Au Ammo Empmhm cowumsam> AHOQEH .n.o.m on» Amps: coAuomuoucH uouowm unonum 0cm MMAAMBII.A.A mqmfle 56 4.4 Policy Implications of the Effective Protection Concept Implications of the effective tariff protection concept for policy formulation have received much atten— tion in the literature.4 Effective protection calcula- tions quantify the net effect of national trade barrier structures on the level and pattern of protection among industries. Tariff and freight factor structures inter- act to determine the combined level of protection afforded each U. S. import competing industry. This interaction is expected to modify some of the more important effective tariff commercial policy implications. It will prove a useful exercise to summarize the policy implications to be explored with combined effective protection rate cal- culations. First, effective protection calculations can be used to indicate the direction of resource flows induced by trade barrier structures. While consumers are guided in purchasing decisions by relative prices of final goods which vary directly with nominal tariffs and freight factors, the effective protection rate influences pro- ducer's decisions by altering production process costs. Protection alters value added in domestic processing 4A summary of effective tariff protection policy implications may be found in Kreinin (34, pp. 298-300) and Grubel and Johnson (25, pp. 4-8). 57 activities. Industries experiencing the greatest percent- age increase in domestic value added per unit of output with the introduction of protection will tend to attract productive resources from those activities afforded lesser degrees of protection. Thus, estimates of industry level effective protection rates will indicate the direction that resources will tend to move before substitution is allowed to take place between domestic primary factors and imported inputs.5 Tariffs largely result from commercial policy considerations, but freight factors derive from commodity and route characteristics. There is no reason to expect the two restrictions will exhibit similar rate structures. An empirical investigation of the joint influence of tariff and freight factor structures on domestic value added is likely to reveal a pattern of protection induced interindustry resource flows which differs markedly from that suggested by an analysis of tariff protection alone. 5The effective protection model, using fixed input coefficients, assigns the role of guiding resource alloca- tion to value added. Traditional price theory rightfully assigns this role to profits. Tariff structure changes will affect value added and profit in the same way when no substitution is allowed between primary domestic fac- tors (for example, labor) and imported inputs. Protection accorded to value added can therefore indicate the resource allocation impact of tariff structure. With substitution, a new model must be formulated to analyze the resource allocation impact as protection to value added and profit may diverge. See Kreinin, Ramsey, and Kmenta (35). 58 It also follows that effective protection rates would serve as a rough guide to the degree of resource misallocation resulting from the structure of trade impediments. Tariff protection promotes domestic ineffi- ciency by allowing producers to incur higher production costs than their foreign competitors. A comparison of effective tariff rate levels should indicate the distor- tion in resource flows over the situation which would prevail in the absence of tariffs. The impact of arti- ficial tariff and natural barriers on resource allocative efficiency will differ insofar as freight factor levels reflect the true service cost of shipping commodities over distance. The most important factor accounting for variations in freight charges on individual commodities is found to be the stowage factor, a measure of cost. Protection from the cost based portion of freight factors on individual commodities is compatible with economic efficiency and does not entail economic waste. This com- ponent of effective freight factor rates serves as a guide to the natural effect on resource allocation resulting from the necessity of overcoming frictions imposed by distance as compared with the frictionless world case. Factors not related to the cost of producing transport service also enter the rate determination process. Pro- tection from this component of freight factor structure 59 will interfere with resource allocative efficiency in the same manner as artificial trade barriers. The true impact of effective freight factor protection rates on resource allocative efficiency can only be arrived at by separating the structure of freight factors into cost and noncost based components. In practice it is not possible to separate monopo- listic and competitive elements of individual freight rates, nor can this difference be assessed for product groups on the industry level. Liner companies refrain from attempts to apportion service costs among units of heterogeneous commodities. The stowage factor cannot be used to apportion capacity costs between various commodi— ties in the absence of data on voyage costs and capacity constraints. Jansson (29) proposes that the average cost of operating the marginal ship be employed as a practical proxy for the marginal cost of ship space. This would involve comparing the revenue accruing from the most rate elastic commodities moving along a fully loaded leg of a route with the annual unavoidable costs of operating the marginal ship. Conferences are reluctant to divulge this information. Empirical evidence on the structure of freight rates affords but one generalization. A large proportion of the variance in rates on individual commodi- ties is explained by differences in product bulk. When 60 total protection afforded a particular productive activity is equally divided between effective tariff and effective freight factor rates, the latter will disrupt resource allocative efficiency to a lesser degree than will the former. Second, effective protection rates serve as a rough guide to determine comparative advantage when industries are assumed to adhere to the maximum degree of inefficiency permitted byzanation's protective structure. Ranking industries in descending order by their effective protection rates is equivalent to an inverse ranking of the degree of comparative advantage as it would exist under free market competitive conditions. Previous attempts to arrive at a comparative advantage ranking by comparing rates of effective tariff protection do not incorporate the interaction between tariff and freight factor structures which determines the combined level of protection afforded each U. S. import competing industry. The inclusion of freight factor structure may reveal a different pattern of industry ranking by degree of com- petitiveness in world markets. A corollary to this analysis concerns the discov- ery of negative effective tariff rates for some productive activities. Negative effective tariff protection rates can result when the weighted average tariff on imported 61 inputs exceeds the nominal tariff rate on corresponding final products. If industries remain competitive in spite of this handicap, their survival could be inter- preted as evidence that the country enjoys a considerable comparative advantage in this product line. Although the net effect of the structure of tariffs is to tax the specific process, this industry could be surviving under a high rate of effective freight factor protection. A final implication concerns the cascading effect of tariffs and the joint influence of freight factor structure in determining the overall degree of protection afforded each stage of the production process. Most industrialized nations escalate their tariff structures according to the stage of fabrication of import competing goods. Raw materials enter virtually duty free. Higher rates are observed on intermediate products made from crude materials, still higher tariffs on semimanufactures, and even higher rates on finished products. Technologi- cally sophisticated consumer goods and capital equipment prove the exception by carrying relatively lower duties.6 When nominal tariffs are an increasing function of the stage of fabrication, effective tariff rates on final manufactures will be much higher than nominal rates indi- cate. Tariff escalation is held to pose a significant 6See, for example, Balassa (3). 62 barrier against attempts by low income nations to indus- trialize. When crude materials enter duty free, even modest nominal tariffs on processed raw materials trans- late in effective protection terms to very high duties. The problem is compounded when value added in the process- ing activity is low. If the structure of freight factors is found to be an increasing function of the stage of fabrication, either for cost of service reasons or as a result of monopolistic pricing practices in charging "what the commodity will bear," both tariff and freight factor structures would be biased against the location of final assembly operations in developing areas. The heterogen- eity of commodities and their intrinsic transport char- acteristics defy attempts to theoretically justify the existence of an escalated freight factor structure. On one hand, crude materials display relatively low unit values. A small freight charge will represent a large percentage increase in unit price. (But raw materials move in large quantities, are easy to handle and stow, and are usually carried by tramps. Final manufactures display relatively large stowage factors, but move in smaller volumes and are of higher unit value. The impact of freight factor structure on tariff escalation and the relationship between total nominal and effective 63 protection levels can only be determined from an empirical investigation. 4.5 Previous Empirical Studies There have been few published attempts to estimate the magnitude of nominal transport charges for interna- tional commodity flows and only one study comparing effec- tive rates of protection from tariffs and freight factors computed from actual shipping charges.7 The reason for this lack of empirical investigation is that comprehensive data on international freight charges are not readily accessible. In principle, the difference between free-on- board (f.o.b.) and cost-insurance-freight (c.i.f.) import values obtained from commodity trade statistics represent the cost of freight and insurance. Attempts to compute these c.i.b./f.o.b. ratios for use in empirical studies . 8 . encounter substantial measurement errors. Various 7Tables of freight factors for a limited number of product groups are contained in Moneta (45), Balassa (5), Lipsey and Weiss (40), and KraVis and Lipsey (33). Finger and Yeats (20) compares nominal and effective protection from tariffs and freight factors for United States imports. 8A discussion of measurement errors resulting from discrepencies in "partner country" trade statistics may be found in Bhagwati (12). Waters (70) employs c.i.b./f.o.b. ratios from trade statistics to calculate effective freight factor protection rates for U. S. import competing industries. Calculations are based on c.i.f. import values. Commodity categories and empirical results are not comparable with the present study, or that of Finder and Yeats (20) and will not be included in the following discussion. 64 Congressional hearings provide a second data source, par- ticularly those of the Joint Economic Committee on Dis- criminatory Ocean Freight Rates and the Balance of Payments.9 But, commodity descriptions do not correspond with commodity trade classifications, being either too specific or too broad. Finger and Yeats (20) obtain trans- port charge data from a 1965 Census Bureau Study of the difference between official customs and c.i.f. valuations for United States imports.lo Ad valorem equivalents to freight and insurance costs are computed from records of actual shipments. Finger and Yeats compare United States nominal and effective protection rates afforded thirty-eight product groupings from post-Kennedy Round tariffs and from inter- national freight factors. The following commodity groups are included in the study: food products, textiles and products, leather goods, lumber and paper products, non- ferrous metals, steel manufactures and machinery. Results 9U. S. Congress, Joint Economic Committee. Dis- criminatory Ocean Freight Rates and the Balance of Pay- ments, 88th Congress, lst and 2nd sess., parts 1 through 5, June 20 and 21, 1963, October 9 and 10, 1963, November 10 and 20, 1963, and March 25 and 26, 1964; and 89th Con- gress, lst sess., parts 1, 2, and 3, April 7 and 8, 1965, May 7, 1965, June 30, 1965. 10See United States Tariff Commission. C.I.F. Values of United States Imports, Washington, D.C., Febru- ary 1967, and Unitéd States Bureau of the Census. C.I.F. Calculation Adds 9 Percent to Import Figures, Washington, D.C., December 20, 1966. Data are reprinted in Lipsey and Weiss (40) and Kravis and Lipsey (33). 65 indicate that both nominal and effective freight factors pose a barrier to trade at least as high as that afforded by United States tariffs. Nominal freight factors are found to exceed nominal tariffs for twenty-two of the thirty-eight product groupings. Effective freight factor rates are at least as high as effective tariffs for twenty of the groups. Six cases display negative effective rates of tariff protection, but all effective freight factor rates are positive. Effective freight factors are of sufficient magnitude to impart an overall positive effec- tive rate for these commodities. Freight factors and tariffs are found to exhibit similar patterns of escala- tion with stage of processing. Both are found to bear more heavily on U. S. imports from developing rather than from develOped areas. 4.6 Conclusion Protection from international transport charges can be analyzed in the same manner as tariff protection. The inclusion of freight factors into the standard effec- tive tariff protection framework has been suggested by Balassa (5). Tariff and freight factor structures inter- act to determine the combined level of protection afforded import competing industries. There exists no theoretical justification for expecting the two trade impediments to exhibit similar structures. Tariffs are a commercial 66 policy variable while freight factors are largely deter- mined by commodity characteristics. When allowance is made for the joint influence of tariff and freight factor structures in effective protection calculations, results should reveal a different pattern of protection induced resource flows than would be suggested by an analysis of effective tariff rates alone. Most studies of international trade restrictions neglect freight factors by assuming them to be small relative to other price distorting influences. Finger and Yeats (20) offer evidence to the contrary. Whether measured in terms of nominal or effective rates, protec- tion from freight factors is found to be at least as high as that afforded by post-Kennedy Round tariffs in the United States. The conclusion is based on transport charge data more than a decade old. Since this base period, freight factor levels have had the opportunity to adjust in re3ponse to advances in maritime technology, currency realignments and major petroleum price increases. An additional study is warranted to establish the rela- tive importance of freight factor structure as a barrier to trade. CHAPTER V EFFECTIVE PROTECTION CALCULATIONS: DATA AND METHODOLOGY 5.1 Introduction Effective protection calculations will require recent information concerning tariffs and freight factors on crude materials, intermediate goods and final products as well as on the share of value added by domestic pri- mary factors in the various producing activities. There are two alternative ways to approach this problem. First, a sample of narrowly defined production activities may be selected for investigation. This method is likely to yield a more accurate representation of protection for these processes, but problems are encountered in aggre- gating results to assess the industry level pattern of protection. The present study employs a second approach. Input-output tables provide information required to iden— tify import-competing industries and their input require- ments. The level and pattern of protection among produc- tive sectors is determined within the interindustry framework as portrayed by the input—output table. This method requires accepting a high level of aggregation 67 68 and protection-induced substitutions between inputs are ignored. 5.2 Industry Output and Input Identification Three distinct sets of effective protection calcu- lations are presented in this study. First, comprehensive industry level estimates of effective protection stemming from tariffs and freight factors are provided for United States import competing industries. The tax-subsidy influence of freight factor and tariff structures will then be assessed for U. S. export and import competing industries in trade with the European Community and with Japan. Finally, nominal and effective protection from both barriers will be assessed for United States produc- tive activities by stage of fabrication. The industry output identification procedure differs for each approach. U. S. import competing industries are classified with the aid of an input-output table compiled by the Bureau of Economic Analysis, U. S. Department of Commerce. The publication contains input requirements for 121 sec- tors of the United States economy for the year 1970.1 1Effective protection estimates frequently employ production coefficients more than a decade old. Yeats (72) estimates that input shares of this vintage imparts, on the average, an error of 12 percent in effective pro- tection calculations. The input—output table used in the 69 Fifty-four sectors are investigated in this study. For specific coverage, refer to Table 5.1. The only major import competing sectors excluded from the analysis are the livestock and agricultural industries. Data for these sectors are tabulated at a high level of aggrega- tion, making it difficult to assign freight factors to individual product groupings. Furthermore, world trade weighted tariff rates were not available for these sec- tors. A recent United States Tariff Commission survey of nontariff barriers (68) is used to identify twenty-one U. S. export sectors which registered complaints against discriminatory ocean freight rates. Interest centers on these sectors for two reasons. First, if freight factors weaken the ability of U. S. eXporters to compete abroad by posing a greater barrier, both in nominal and effective terms, against U. S. exporters than that encountered by foreign exports destined for the U. 8. market, this pattern should be revealed in our choice of U. S. export sectors actually registering rate complaints. Secondly, a significant number of product groupings from these sectors enter trade both as exports and as imports. It was not possible to establish a close correspondence between exports and imports at this level of aggregation present study is the most recent table currently avail- able. 70 TABLE 5.1.--United States Industry Categories Sector Industry S.I.T.C. 21 Tobacco manufacturing 112.1-3 22 Broad and narrow fabrics, 651.1-4; 651.6-7; yarn and thread mills 652; 653; 655.5 25 Apparel 841; 842 27 Logging, sawmills and 242; 243; 631.8 planing mills 28 Millwork and plywood 631.1-2; 631.41-42; 632.1-2; 632.4; 632.71-73; 632.81-82; 632.89 29 Household furniture 821.03; 821.09 30 Other furniture 821.01; 821.02 31 Paper products 251; 641; 642.2-3; 642.9 32 Paperboard 642.11—12 35 Chemical products 241.2; 512; 514; 515; 532 less 532.3; 533.1-2; 551.1, 561.1; 571.1-3; 599.5-7 36 Agricultural chemicals 561 less 561.1; 599.2 37 Plastic materials, 231.2; 581 synthetic rubber 38 Synthetic fibers 651.61-62; 651.71-72 39 Drugs 541.1; 541.3; 541.5; 541.61-63; 541.7 40 Cleaning and toilet 553; 554 preparations 71 TABLE 5.1.-—Continued Sector Industry S.I.T.C. 41 Paint 533.2 42 Petroleum products 331 less 331.01; 332; 661.8 43 Rubber products 231.3; 621, 629; 841.6; 851 pt. 44 Plastic Products 851 pt.; 893 45 Leather footwear and 611 less 611.2; leather products 612.2-3; 612.9; 831; 851 pt. 46 Glass 651.8; 664 47 Cement, clay and con- 273.21; 661.1-2; crete products 662-3-4; 663.7 49 Blast furnace, basic 671-677; 678.1-4 steel products 50 Iron and steel 671.32; 678.1; foundries 678.5; 679.1-2 51 Primary c0pper metals 283.12; 682.11-13 52 Primary aluminum 284.04; 684.1 53 Other primary and secon- 283.22; 284.03-09; dary nonferrous metals 683.1; 685.1; 686.1; 687.1; 689.31; 689.41-43; 689.5 54 Copper rolling and draw- 682 less 682.1 ing 55 Aluminum rolling and 684 less 684.1 drawing 56 Other nonferrous rolling 681; 683.2; 685.2; and drawing 686.2; 687.2; 688; 689 less 689.31; 693.1 72 TABLE 5.1.--Continued Sector Industry S.I.T.C. 58 Metal containers 692.2 59 Heating apparatus, 697.1; 697.22; plumbing fixtures 812.1; 812.3 60 Fabricated structural 691; 692.1; 692.3; metal products 693.4; 711.1; 711.2; 711.7 61 Screw machine products 694.21; 694.22; 697.21; 697.23; 698.4; 698.91 63 Engines, turbines, 711.3; 711.6; 711.8; generators 722.1 64 Farm machinery 712.0; 719.64 65 Construction, mining 695.24-26; 718.4; and oilfield machinery 718.51; 719.91 66 Material handling equip- 719.31-32 ment 67 Metal working machinery 695.24; 715.1; 715.22-23; 729.6 68 Special industrial 712.91; 715.21; machinery 717.11-14; 717.2; 718.11-12; 718.21-22; 718.29; 718.31; 718.51-52; 719.61-62; 719.8 69 General industrial 698.3; 698.81; machinery 719.11; 719.14; 719.64 70 Machine shop products 711.89; 719.99 71 Computers, peripheral 714.3; 714.92 equipment 73 TABLE 5.1.--Continued 8.. Industry Sector S.I.T.C. 72 Typewriters, office 714.1-2; 714.91; machines 718.29; 719.63 73 Service industry 717.15; 719.12; machines 719.15; 719.21-22; 719.7 74 Electrical transmission 722.1-2 pt. and distribution equip- ment 75 Electrical industrial 722.1-2 pt.; 729.92; apparatus 729.96 76 Household applicances 697.1; 717.3; 719.4; 725 78 Radio and TV receiving 724 less 724.91; sets 729.7; 729.93; 891.1-2 79 Telephone and telegraph 724.91 apparatus 80 Radio TV transmitting, 724.10 signaling and detection equipment 83 Motor vehicles 732 less 732.9; 733.3 84 Aircraft 734 less 734.92 86 Railroad and other 719.66; 731.1-7; miscellaneous trans- portation equipment 732.91-92; 733.11 74 for the remaining U. S. import competing industries. National input-output tables also differ in their indus- trial sector classifications. To achieve consistency in product groupings, the U. S. input—output table is used to approximate production techniques used in the European Community and Japan, under the assumption that industrial nations exhibit similar input-output relationships. Input-output tables are not compiled in a manner which facilitates the examination of a large number of processing activities by stage of fabrication. The most detailed U. S. input-output table currently available is used to identify nine manufacturing activities by stage of processing.2 These include tobacco manufacturing, textiles and products, leather and products, lumber and paper products, nonferrous metals and iron and steel manufactures. Three processing stages are examined for all but one case. Twenty-seven product groupings of interest to developing and developed nations are covered in the analysis. To prepare for the comparison of products, freight factors, and tariffs, it was necessary to establish a concordance between U. S. input-output data recorded under the Standard Industrial Classification (SIC) code 2U. S. Department of Commerce. Input-Output Structure of the U. S. Economy, 1967, Vol. 3, Washington, D.C.: U. S. Government Printing Office, 1974. 75 and their matching Standard Industrial Trade Classifica- tion (SITC) number. Matching the data was facilitated by tables contained in (58). Correspondence was generally established at the 5-digit level. It was convenient to employ a higher level of aggregation for some final product groups. A recent U. S. Census Bureau publication (59) was used to identify each industry's outputs and major material inputs. Between 10 and 30 percent of total materials consumed fell into the "all other materials" category. When it was not possible to identify a specific material input, the weighted average tariff duty and freight factor associated with its product group was cal- culated and applied. 5.3 Imputed "Free-Trade-Frictionless" Input Shares Production coefficients obtained from input-output tables are usually distorted by tariffs and freight fac- tors. The effective protection formula presented in Chapter IV calls for the use of input shares as they would appear in the absence of these barriers. When the pur- pose is to investigate tariff protection alone, two options are available. First, one can assume that indus- trial input-output relationships in some industrial nations with very low tariffs can be used to approximate techniques used by all industrial countries if tariffs 76 did not exist.3 Second, distortion-free coefficients can be inferred by assuming that free market prices equal protected prices deflated by tariff rates on inputs and output. Both approaches have been previously used and very little theoretical or empirical evidence exists to establish the superiority of one approach over the other. The present study approximates "free-trade-frictionless" input shares through deflation of observed production coefficients by both tariffs and freight factors on out- puts and inputs. This procedure is outlined in section 4.2. Implicit in the above approach is the assumption that input coefficients remain unaltered between protec- tion and free trade situations. Protection induced sub- stitutions between imported inputs and value added by domestic primary factors would be expected in response to changes in the relative price of outputs and of imported inputs. When substitutions towards cheaper inputs are ignored, an upward bias of an unknown magnitude is imparted to effective protection estimates. Results could yield incorrect conclusions concerning expected interindustry shifts of domestic primary factors. Little evidence exists to assess the impact on effective protec- tion calculations of such changes in input shares. 3For an example of this approach, employing Benelux country input shares, see Balassa (4). 77 Balassa and Associates (2) studied tariff protection structure in seven industrial nations and concluded that effective protection rankings did not differ materially when calculated by national input coefficients versus coefficients adapted from the Netherlands and Belgium where tariff rates are low. For countries with sizable nonuniform tariffs and freight factors, the influence on rankings is likely to be small. 5.4 Nominal Tariffs and Freight Factors Tariff rates are obtained from a recent GATT tariff study (23). Since each S.I.T.C. product group is a composite of several different commodities, it is nec- essary to obtain an average tariff rate and apply it to the entire group. Tariff averages computed from "world trade" weights were chosen from the GATT study to avoid the bias associated with using "own import" weights.4 World weights are also biased to the extent that inter- country similarities in the structure of tariffs fail to reflect what the free trade composition of trade would have been for each country. Several major petroleum price increases and exchange rate realignments have 4World imports are the total imports of the eigh- teen developed countries included in the GATT study. A discussion of the bias associated with different weighting schemes on effective tariff protection estimates may be found in Tumlir and Till (52). 78 occurred since the 1970 base year of the GATT study. World trade weights will avoid in large part the influence of such events on the commodity composition of trade for a particular country. Two additional steps are required to complete the tariff assignment process. First, the GATT study had cal- culated tariff rates for chemicals on the assumption that the Kennedy Round "ASP" package would be implemented. Since the U. S. Congress failed to enact supporting legis- lation, the agreement never came into force. Chemicals ranked eighth among all United States industrial imports. It, therefore, becomes necessary to obtain a tariff aver- age for chemical products from the United States Tariff Commission survey of nontariff barriers (68). Tariff rates reflect the effect of assessing U. S. duties on benzenoid chemicals on the American Selling Price system of customs valuation. Second, tariff rates in the GATT study are adjusted to reflect the recent unilateral reductions made in Japanese tariffs. In 1972, 80 percent of the rates of duty received reductions by 20 percent, 2 percent of the rates were made duty free and 6 percent were cut by amounts ranging from 10 to 95 percent. Rate reductions applicable to the various industrial sectors were iden- tified from the United States Tariff Commission survey (68). 79 Freight factors for individual commodities are calculated from liner conference freight rate schedules maintained on file at the Federal Maritime Commission (FMC). Since freight rates are normally quoted on a per unit basis, several steps are required to obtain their ad valorem equivalents. First, major trade routes con- necting the United States with the Far East, Latin America and Western Europe are identified with the aid of a recent Maritime Administration publication (66). Table 5.2 offers detailed information on the route patterns. Sec- ond, the liner conferences operating over each route leg are determined with the help of FMC officials and from tables contained in Marx (43, pp. 176-181). Freight rates for individual commodities are compiled according to the S.I.T.C. classification for most routes. The Brussels Tariff Nomenclature (BTN) classification is used on North Atlantic/Western Europe routes. A third step entails extracting freight rates for the necessary commodities and converting all rates to a long ton (2240 pounds) basis. The majority of conferences apply rates per long ton or 40 cubic feet, whichever produces the greatest revenue for the member line. Stowage factor tables are used to convert measurement ton rates to their long ton equivalents.5 North Atlantic/West European trade route 5Stowage factor tables are contained in Leeming (37), Ford (21), Garoche (22), and Thomas (49). 80 ummm umm\ohucmHu¢ Busom .m .o swanwmnu .ccAHm .n camumw an omnmmfl .muozm .mm .02 wwwuma .oocoummcou ummm Mom blush .mm .02 Nuance .mocoummcou unmflwuh caucmHu< .m .D\ummm mom mane com vaucmHufl monox\smmmn moan NH «loam osmHmHH cuuoz .sflmuflum .bc .oz Nuance .mocmuomsou unmwmum ummuuxummoo unnamHum .m .: socmcflx umufigo oaucmaua :uuoz ooah ummou owusmaué .m .D vMIsz .soHUMAUOmmfi \ccmHmHH auuoz .camuflum ummuu unmhmum ezsonummz oaucmHuc nuuoz ommm HH Vlozm ofiucmaua .m .02 «magma .oocmummcoo unmflmum cocoMm\oHucmHud nuuoz .m .D caucmau< nocmum UHHGMHD¢ nPHoz co>msuosonm .cmsmum :mEhfimnu .wmamox .m mason an cosmmw .muonemm .Emoumum5< .Emonmuuom vuozm .mm .02 «manna .oocmuowsoo .muozu:¢\owucmHuc< nuuoz .m .D unmwmum Hmucmcflusou oeucmHuc nuuoz :88 cavemaud nuuoz .m .D\cflmmm IuHan .somsmflumfiunu .o .o an Uosmmfl pom mosmum OADGMHufl .mocmaumsuwz .muuzm .o MMHHMB .oosmuomcou unmfloum .Eswoaom .xcmEuou .Eoomsflx omuflso UGSODUmmz owusmHum nuuoz amusocflpsoo oamm mlmlhim coflumcflumwo\cflofluo wocouwmcoo .02 $600 .02 ousom mouzom momma cwflwuom mwumum copes: usaonuso pom ccsondH omuowammll.m.m mqmda 81 mane pom ohucmau< .m .o\mhnssaoo .waflno .summ .moauofid nunom ammou umm3 ummm umm\ummoo UHmaomm .m .D UALHomm .m .:\ummm was maso can UHHCMHud .m .D \Hflumum .mowuwa< nusom ummou ummm «H90 .m .D\>mammumm .>msmnua .msfiucmmH4 .mofluwfid nusom unmoo ummm casuflmao .Hamnmumz .o AHan poommfi .Hlozm .mocoumwcou boson Inuuoz moanmfid :uoom ummou umoz smauwmno ..Ho .>60 .0 .0 an omammw .mnuzm .m .02 umauma .mosm nuomcoo unmwmum coconumms ofluwomm coauwmnu .>an .o .m an omommfi 665 .mm .02 333. 638.853 mo oocmummcou unmwmum owmaommlmcmua Hmfi>oq .¢ .m xcmum cwmumwu an coommfl onozm .H .02 monuma =.o= coauomm .oocouomsou usmflmum smownoaduumucH muozm .m .02 madame =.m= cofiuomm .mocmumwcoo unmwmuh cmofiuwsdnumusH oammh Hm hm omH mm Umwom H mmwom ON cowumcfiummo\cfimfluo monouomcoo .oz mooo .oz munoa coacflucoosu.m.m mamas 82 rates require an additional adjustment as they are assessed on the basis of 1000 kilos weight or one cubic meter.6 Finally, unit freight rates are converted to their ad valorem equivalents. Freight rates are assessed in U. S. dollars and apply from the vessel loading termi- nal at the port of export to the member line terminal at the port of import. It is, therefore, necessary to express rates as a percentage of free-alongside-ship (f.a.s.) unit import values computed from value and ton- nage data contained in commodity trade statistics (60, 61, 62, 63).7 Thus freight factor calculations derive from a base representing the average unit value of actual imports which enter over the freight charge. Each commodity is then assigned a freight factor and a tariff rate. Weights are applied in the manner previously described. 5.5 Nontraded Inputs Nontraded inputs, like services and electricity, present a problem for measuring and interpreting effec- tive protection estimates. Consider, as do most studies, 6Weight-volume conversion tables are contained in Martin (42), pp. 198-215. 7The alternative approach would be to subtract handling charges at the port (which are not known) from unit freight charges and express the result as a percent- age of free on board (f.o.b.) unit import values. 83 only the effects of tariffs. Domestic prices of non- traded inputs are not strictly equal to their free market prices plus the tariff. While traded material inputs are deflated to arrive at their world market price, non- traded inputs are generally not deflated. When nontraded inputs are treated as ordinary inputs with zero tariffs, as in studies by Balassa (4) and Basevi (9), the level of protection to value added is overstated. A question arises whether nontraded inputs should be considered as a part of value added of the industry using them, or be treated as ordinary inputs with tariff rates determined by the weighted average tariff rate on their traded input content. Consider the first approach. Corden (18) argues that nontraded goods should be treated like primary fac- tors as both prices are determined within the system. If traded goods are assumed available in infinitely elastic supply, their prices are given parameters to be altered by tariffs. Protection for an activity producing a traded product represents protection for domestic primary fac- tors and for nontraded inputs intensive in that activity as well as protection for domestic primary factors inten- sive in the nontraded input industries. To arrive at the appropriate value added share for the traded final prod- uct, one must combine with all direct contributions, the 84 indirect contribution made by domestic primary factors through nontraded inputs into the nontraded inputs. For example, let 50 percent of the value of the final product be composed of direct traded inputs, and 30 percent of nontraded inputs. If two—thirds of the cost of these nontraded inputs consists of traded inputs while the remaining third is value added, then the total traded input share for the final product will be 70 percent. The direct contribution of primary factors (20 percent) plus the indirect contribution (10 percent) by primary factors through nontraded inputs gives the true value added. Tariffs are then applied to the indirect traded inputs. The argument for treating nontraded goods like primary factors is based on the following example.8 Con- sider a simple Heckscher-Ohlin model with two traded goods produced by labor and capital. Replace capital with a nontraded good produced entirely by a factor which cannot be used to produce either final product. Now let the price of both traded goods double with the introduc- tion of protection. Relative prices will remain the same and nothing will change. But if the nontraded good is now treated like an intermediate input, Corden argues that the value added of the relatively labor intensive 8The criticism of Corden's approach may be found in Ethier (19, pp. 34-35). 85 final product will fall relative to the value added of the other. Corden's example consists of relabelling a primary factor as a nontraded good. The conclusion that both should be treated alike naturally follows. When a clear distinction is drwan between primary factors and nontraded goods, the price of nontraded goods will also be observed to double, leaving all relative values unchanged. The second approach treats nontraded inputs as ordinary inputs. By definition, the output of a non- traded good sector cannot be traded. It also requires at least one input which can be used as an input into other industries. Protection affects the price of non- traded goods by increasing the cost of their material inputs. It is reasonable to assume these cost increases will be passed on to the consumer of nontraded goods in the form of higher prices. If nontraded goods are avail- able to domestic industries in infinitely elastic supply, the passing on of protection induced cost increased can conveniently be represented by an upward shift in the supply schedule. This study treats nontraded inputs as ordinary inputs. Nontraded goods are assumed available in infinitely elastic supply. When material input costs rise with the introduction of freight factors and tariffs, 86 these cost increases are entirely passed on in the form of higher prices. For example, if 20 percent of mainte- nance construction costs consist of imported builder's materials subject to a 10 percent freight factor and a 10 percent tariff, we infer the price of this service is raised by 4 percent. The combined duty from both sources on maintenance construction services is, therefore, 4 percent. Empirical evidence suggests this approach and the Corden method yield similar effective protection estimates.9 9See, for example, McAleese (44, p. 11) and Lewis and Guisinger (39). CHAPTER VI PROTECTION FROM INTERNATIONAL FREIGHT FACTORS AND FROM TARIFFS: EMPIRICAL EVIDENCE 6.1 Introduction This chapter presents three sets of effective protection calculations. First, effective rates of tariff and freight factor protection are provided for a compre- hensive set of U. S. import-competing industries. The combined tax-subsidy influence of tariff and freight fac- tor structures is then assessed for a representative sample of United States export and import-competing indus- tries in trade with the European Community and with Japan. A final set of effective protection calculations is pre- sented for U. S. processing activities by stage of fabri- cation. Each investigation addressed two major questions: 1. Are the levels of effective protection afforded United States productive activi- ties from freight factors and from tariffs of comparable magnitudes? 2. Does the ranking of processes by levels of effective tariff protection differ from that given by the combined rate of effec- tive tariff and freight factor protection? 87 88 The investigation is based on freight factor data pertaining to 1974. Empirical findings will be altered to the extent that freight rates have changed relative to import values in recent years. To indicate the direction of recent movements in these factors, freight rate indices are compared with import unit value indices for the United States. A final section summarizes the study's major findings. 6.2 United States Nominal and Effective Rates of Protection: Industry Level Estimates Table 6.1 summarizes the industry level estimates for nominal and effective rates of protection stemming from U. S. tariffs and freight factors. The combined level of effective protection from both price distorting measures is tabulated in the right-hand column. Average rates, weighted by total OECD imports, are calculated to serve as a rough guide to the relative magnitude of the nominal and effective protection rates. Results indicate that the average degree of pro- tection afforded by freight factor structure is higher than that afforded by post-Kennedy round nominal tariffs. Nominal freight factors are at least as large as nominal tariff rates for thirty-four of the fifty-four industry categories. Effective rates of freight factor protection 89 TABLE 6.1.--Estimated Nominal and Effective Rates of Protection from United States Post-Kennedy Round Tariffs and Freight Factors (A11 Figures in Percents) Nominal Protection Effective Protection Sector Industry Tariffs Freight Tariffs Freight Total Factors Factors 21 Tobacco manufacturing 16.6 5.8 20.0 3.2 23.2 22 Broad and narrow fabrics, yarn and thread mills 23.5 5.3 61.2 2.9 64.1 25 Apparel 24.7 4.2 45.1 1.0 46.1 27 Logging, sawmills and planing mills 0.0 36.6 -4.5 122.8 118.3 28 Millwork and plywood 10.6 19.7 27.4 22.5 49.4 29 Household furniture 6.8 31.3 7.7 80.7 88.4 30 Other furniture 8.6 10.0 12.4 7.8 20.2 31 Paper products 4.1 15.1 4.4 25.6 30.0 32 Paperboard 6.2 12.8 7.7 15.5 23.2 35 Chemical products 9.1 15.5 19.5 28.9 48.4 36 Agricultural chemicals 1.0 19.9 1.4 48.4 49.8 37 Plastic materials, synthetic rubber 8.5 5.5 11.9 1.3 13.2 38 Synthetic fibers 16.1 10.8 27.3 16.0 43.3 39 Drugs 4.6 4.1 4.8 1.2 6.0 40 Cleaning and toilet preparations 7.3 7.2 10.8 -1.5 9.3 41 Paint 6.9 12.7 12.1 20.4 32.5 42 Petroleum products 4.5 11.1 10.3 4.7 15.0 43 Rubber products 5.0 5.1 5.6 3.0 8.6 44 Plastic products 9.5 8.9 19.3 10.2 29.5 45 Leather, footwear and leather products 7.7 8.2 10.0 10.6 20.6 46 Glass 14.1 61.1 32.9 152.7 185.6 47 Cement, clay and concrete products 10.8 54.8 41.9 234.9 276.8 49 Blast furnace, basic steel products 6.1 13.5 14.5 20.4 34.9 50 Iron and steel foundries 8.7 13.1 14.1 20.6 34.7 51 Primary copper metals 1.8 2.1 2.3 -4.6 -2.3 52 Primary aluminum 4.6 5.4 9.4 4.7 14.1 53 Other primary and secondary nonferrous metals 2.6 3.9 6.6 -4.1 2.5 54 Copper rolling and drawing 3.9 2.9 7.5 3.2 10.7 55 Aluminum rolling and drawing 6.9 4.3 17.8 5.6 23.4 56 Other nonferrous rolling and drawing 7.3 5.3 14.3 7.0 21.3 58 Metal containers 6.4 34.7 8.5 152.4 160.9 59 Heating apparatus, plunbing fixtures 7.0 11.9 10.4 24.4 34.8 60 Fabricated structural metal 5.2 9.4 4.9 10.5 15.4 61 Screw machine products 6.7 9.2 8.8 10.5 19.3 63 Engines, turbines, generators 6.4 8.7 8.3 13.8 22.1 64 Farm machinery 2.1 4.9 -1.6 4.3 2.7 65 Construction, mining and oilfield machinery 5.0 8.7 .52 12.1 17.3 66 Material handling equipment 4.9 8.6 4.7 13.6 18.3 67 Metal working machinery 7.7 6.9 10.6 8.4 19.0 68 Special industrial machinery 6.4 4.8 9.1 3.2 12.3 69 General industrial machinery 6.5 6.1 8.6 6.2 14.8 70 Machine shop products 8.2 3.0 10.3 0.0 10.3 71 Computers, peripheral equipment 5.2 2.9 4.7 2.1 6.8 72 Typewriters, office machines 5.8 3.1 6.7 0.0 6.7 73 Service industry machines 6.5 5.5 8.3 3.0 11.3 74 Electric transmission and distribution equipment 7.7 8.5 10.6 12.5 23.1 75 Electric industrial apparatus 7.4 3.9 8.1 0.0 8.1 76 Household appliances 6.1 5.2 5.5 1.0 6.5 78 Radio and TV receiving sets 6.7 4.1 15.2 2.4 17.6 79 Telphone and telegraph apparatus 8.0 7.9 9.8 10.3 20.1 80 Radio TV transmitting, signaling and detection equipment 7.2 7.4 8.3 10.5 18.8 83 Motor vehicles 3.3 11.3 -1.0 24.5 23.5 84 Aircraft 5.0 5.3 4.6 7.2 11.8 86 Railroad and other miscellaneous transportation equipment 8.8 9.6 22.8 21.3 44.1 Average, weighted by total OECD imports 7.3 12.1 12. 18.7 31.6 90 are as high or higher than effective tariff rates for twenty-six of the industries. A comparison of these estimates reveals that effective tariff rates exceed nominal tariff rates in forty-four cases while effective rates of freight factor protection exceed their nominal counterparts for thirty- one industries. The average degree of escalation, as measured by effective rates minus nominal rates, for both barriers is found to differ markedly within industry cate- gories as well as across industries. Effective rates for both barriers are frequently double their nominal counter— parts. The logging, cement and metal container sectors show levels of effective freight factor protection more than triple that indicated by nominal freight factor rates. Few sectors display both high effective tariff and effective freight factor rates. This suggests that lower effective tariff rates are being offset by higher rates of effective freight factor protection for indus- tries producing relatively bulky and/or low valued prod- ucts. One third of these industries display rates of effective freight factor protection which fall short of their nominal freight factor rates. This situation arises when nominal protection from freight factors on output is partially offset by the increased production costs 91 resulting from freight factors on material inputs. Three sectors show negative effective tariff rates. Effective freight factor rates are negative for three additional industrial processes.1 Tariff and freight factor struc- tures interact to impart an overall positive effective rate for all but one case. The primary copper metals sector proves the exception by carrying a negative com- bined effective protection rate. Several important conclusions derive from the order of industrial protection. First, combined effective protection calculations convey information regarding the direction of protection-induced interindustry resource flows. Resources are attracted towards productive activities which experience the greatest percentage increase in domestic value added with the introduction of protection from tariffs and freight factors. Examination of the results contained in Table 6.1 reveals that few sectors enjoy high effective protection rates from both tariffs and freight factors. The ranking of industries in descending order by combined rates of effective protec- tion can, therefore, be expected to infer a different 1Negative effective protection rates result from the weighted average nominal rate of duty on imported material inputs exceeding the nominal duty rate on final product imports. None of these negative effective protec- tion rates result from negative "free-trade-frictionless" value added. 92 pattern of protection induced resource flows than that suggested by a comparison of effective tariff rates. Rank correlation coefficients and coefficients of corre- lation between the various nominal and effective pro- tection measures are presented in Table 6.2. The Spear- man's rank correlation coefficient between effective tariffs and combined effective rates is .507, while that for combined effective and effective freight factor rates is .814. Combined effective rates infer a pattern of industrial protection and direction of resource flows quite distinct from that indicated by effective tariff rates. Both effective tariffs and effective freight factors are found to vary positively with combined effective rates, but the strength of association differs substantially between the pairs of effective protection measures. The coefficient of correlation between effec- tive freight factors and combined effective rate is .972 while that for effective tariffs and combined effective rates is only .459. Freight factor structure appears to exert a dominating influence in the determination of the pattern of combined industrial protection. The protection pattern change resulting from freight factor inclusion is of interest. Effective rates of tariff protection are highest for broad and narrow fabrics, apparel, cement, glass, millwork and 93 .mocmoflmwcmwm mo mHm>mH ucmmmummu mfimonpsmumm on» as newsman .cowumamuuoo mo ucmfi0flmmooo on» ma manna“ stoa one .ucoflowmmmou soaumamuuou xcmm m.CMEumomm map ma ucofimam comm cw musmwm woman one "muoz m>fluommmm omswnfiou Aaoo.v mmv. AHoo.v numenma mom. m>wuommmm Aaoo.v ono.v mum. cam. muouomm iaoo.c io-.c unmamum vam. moa. m>fluommmm .Hoo.v Aaoo.v Aaoo.v «mm. hem. mum. “Hoo.v Aaoo.v Aaoo.v Hmcaeoz emm. mmw. emu. pmanEoo Aamo.v Aaoo.v Ammm.v Aaoo.v own. now. mvo. va. Aaoo.v Aaoo.v Ammm.v Aaoo.v mmmwuma «we. mum. mod. vmm. Hmsflfioz Aaoo.v Aomo.v Aaoo.v Aaoo.v Aomm.v mam. 5mm. Amvm. Ahmm.v Hmo. mnouomm iaoo.c iomo.c iaoo.c iaoo.c AHHH.V pamamum man. mam. mam. Ahmm.v mod. HmsHEoz muouomm mHOUUMh .mwwww 2wwwmm 2...... .mfimw ”mam“... £32.. . . m>fluommmm . . HmcwEoz mQUMUm UmHflCD Gnu. HOW wwwsmmmz cofluomuoum m>fluommmm can Hmsflfioz :mm3umm mGOADMHmHHOUII.N.w mqmda 94 plywood, synthetic fibers, miscellaneous transportation equipment, tobacco, chemical products, plastic products, nonferrous rolling and drawing, radio and T.V., blast furnace products, and iron and steel foundry manufactures. When the analysis is expanded to include freight factor protection, the blast furnace and steel foundry sector rankings remain intact. Cement and glass products move up the combined effective protection scale. The rest of the aforementioned sectors decline in rank and the positions they vacate are occupied by industries which produce relatively bulky items under varying degrees of effective tariff protection. Sectors experiencing the greatest increase in rank include metal containers, logging and sawmill products, household furniture, agri- cultural chemicals, heating apparatus, paper products and motor vehicles. Overall, when freight factors are included, four sectors hold their ranks, sixteen indus- tries move up on the scale and the remaining thirty-four sectors occupy lower ranks. A second conclusion follows from the remarkably similar industrial rankings observed between each effec— tive protection measure and its nominal counterpart. The ranking of industries by combined nominal rates appears to afford a satisfactory indication of the combined 95 effective protection pattern. Spearman's rank correlation coefficients between effective tariffs and nominal tariffs is .878, that between effective freight factors and nomi- nal freight factors is .915, while that for combined effective and nominal rates is .924. Third, effective protection rate levels cannot be used to infer the degree of resource misallocation result- ing from the combined structure of nominal tariffs and freight factors. Effective rates of tariff protection indicate the degree to which domestic industries require artificial support to remain competitive with imports. When tariffs are introduced, material inputs are attracted towards artificially inflated returns in protected indus- tries. It is common practice to use the height of effec— tive tariff rates to represent a crude index of the degree of resource misallocation resulting from the presence of tariffs. When freight factor structure is encorporated into the analysis, a different pattern of protection and interindustry resource flows emerge. The ranking of industries by their combined effective rates is different from that suggested by an observation of effective tariff rates. Furthermore, nominal freight factors are based in large part on the cost of producing transport service. Resource movements in response to protection from the cost-based component of effective freight factors do not 96 entail economic waste. Freight factors also contain an artificial component which functions in the same manner as tariffs. In practice, the two components of freight factor structure cannot be separated. Since freight fac- tors partly reflect actual production costs, and industry rankings by combined effective rates and effective tariff rates are observed to differ, the height of combined effective rates do not indicate the degree of resource misallocation resulting from the combined structure of freight factors and tariffs. Finally, combined rates of effective protection can be used to assess the relative competitiveness of different industries in world markets. Ranking indus- tries in descending order by combined effective rates is roughly equivalent to an inverse ranking of the degree of comparative advantage each sector would enjoy in the absence of tariffs and freight factors. Compared to other United States sectors, the industries found to possess the greatest competitive edge in world markets produce primary copper, primary nonferrous metals, farm machinery, drugs, household appliances, office machines, computers, electric industrial apparatus, rubber products, cleaning and toilet preparations, machine shop products, copper rolling and drawing, service industry machinery, aircraft and Special industrial machinery. These products are expected 97 to account for a large share of total United States exports. 6.3 Nominal and Effective Rates of Protection in the United States, the European Community and Japan The previous section of this chapter compares the degree of effective protection for U. 8. import competing industries stemming from freight factors and from tariffs. Also of interest is the magnitude of the barrier imposed by freight factor structure against major U. 8. export industries. A distinguishing feature of international trade is the presence of freight factors which exceed those associated with inland commodity movements, particu- larly for intracontinental trade. Additional costs asso— ciated with overcoming frictions imposed by distance are expected to place U. S. exporters at a competitive disad- vantage in trade with Western Europe, as intra-European trade is not so protected. United States exporters also voice complaints that outbound commodity movements incur substantially higher freight charges than do inbound movements of identical cargo. A secondary burden is placed on U. S. exporters as most foreign tariffs and con- sumption taxes are applied on c.i.f. import value. These issues are addressed by comparing the magni- tude of nominal and effective freight factor protection rates for a representative sample of U. S. export and 98 import competing sectors in trade with the nine country European Community and with Japan. The sectors chosen for investigation are those which registered complaints against discriminatory ocean freight rates with the United States Tariff Commission. All freight factor protection rates are calculated on f.o.b. import and export unit values. In addition,combined rates of protection are calculated under the f.o.b. valuation system for U. S. imports and on the c.i.f. base for U. S. exports to high- light the different manner in which tariff and freight factor structures interact under alternative import valuation bases. Rates of protection encountered by U. S. exports and foreign exports to the United States are presented in Table 6.3. Whether measured in nominal or effective terms, the overall barrier imposed by freight factor structure against U. S. exports to the European Community (BC) and to Japan is found to exceed the level of protec- tion contributed by tariffs. Freight factors constitute a large part of total protection rates encountered by lumber and wood products, paper products, construction machinery, motor vehicles, and miscellaneous transport equipment exports to both foreign markets. When tariffs are levied on a c.i.f. bais, as in the EC and Japan, the result is to equalize the marginal costs among competing sources of supply for these foreign markets. Both freight 99 .Uulfllwuu .2 ‘ EM.“ .8 AIL-:1: u. . 0.0« 0.04 «.44 0.04 «.5 «.0« «.04 0.«4 0.0 0.0 4.«~ «.04 0.0 0.0 0.0 0000004 0000 40009 ma 0000040: 00000>< 0.0« 4.0~ 0.44 0.04 0.0 0.00 0.4« m.0« 0.44 «.0 4.00 «.40 0.44 0.0 0.0 000004000 000000040 44440053004445 .4050 v.3 0440.435. cm 0.0~ 0.0 0.04 0.0 «.44 0.44 m.h 0.0 0.0 «.m 0.44 4.0 0.0 «.m 0.0 00000044 00 0.00 «.44 0.04 4.44 «.0 0.00 0.44 0.0m «.«4 4.44 m.«~ 0.04 0.4- «.44 «.« 0040400: 0000: «0 0.04 0.44 0.0 «.0 4.0 4.0« «.0 0.04 0.0 0.44 0.04 0.04 «.0 0.0 «.0 00000400» 004000000 000 .004400040 .004004000000 >9 04000 00 «.44 s.a «.« 4.0 0.0 4.04 4.04 N.» 0.» 4.0 4.04 «.04 0.0 0.s 0.0 000000000 00040040» 000 000000409 00 4.44 4.« 0.04 0.0 4.0 0.54 «.4 «.04 0.« 0.04 0.04 0.4 «.04 4.0 0.0 0000 004>4ouou >0 000 04000 00 «.04 0.0 0.44 0.0 m.h 0.04 m.« 0.0 4.0 «.0 m.0 0.4 m.m «.0 4.0 0000044000 04000000: 00 0.44 0.« 4.0 0.0 «.0 0.0 0.4 «.0 s.« «.0 4.0 0.0 4.0 0.« 0.0 «00000000 4040000004 400400604» m0 0.04 4.0 «.0 0.0 0.0 «.44 0.0 «.m 0.0 4.0 4.«~ «.44 0.04 0.0 0.0 ucusm4=vo 44034544343 can Swami—354.4» owuuoonm z. 0.04 0.0 «.04 0.4 «.04 0.0 0.4- s.0 0.4 0.0 0.0 0.0 0.0 4.« 0.0 00040000 ou4uuo .04004430049 «0 0.44 «.4 0.04 «.« «.0 0.0 0.0 0.« 0.4 0.m «.04 0.0 «.04 0.« «.0 00600040 0°00 004060: on 0.04 0.0 0.0 0.0 0.0 0.04 «.0 4.0 0.0 0.0 0.04 «.0 0.0 4.0 0.0 44004000: 4040000004 4040000 00 5.44 0.0 0.0 4.0 0.0 0.0 0.« 0.0 0.0 «.m «.44 ~.« 4.0 0.0 0.0 >uo040600 4040000604 4046060 00 «.04 0.0 0.0 «.0 0.0 0.44 0.0 0.0 0.0 «.0 0.04 0.0 0.04 0.0 0.0 >40040600 004400: 4000: 00 0.04 0.04 4.0 0.5 «.0 4.04 0.0 4.0 4.0 0.0 «.04 0.«4 «.0 0.0 0.0 000004000 00440000 4040000: 00 ~.0~ 0.04 0.0 0.44 0.0 0.04 4.04 0.0 0.0 0.0 «.04 4.~4 «.m 0.0 0.0 400040000 04044440 000 004040 004060000000 00 4.«4 «.m «.0 «.m 0.0 «.m 4.4 4.0 0.« 4.0 5.4 «.0 0.4- 0.0 4.« 044004000... nuns 00 ~.0~ 0.4~ 0.0 0.m4 0.0 ~.0~ 0.04 «.4- 0.04 0.0 «.«4 0.04 0.5 0.44 4.0 vasoauoaua «« 0.40 0.04 0.«4 0.04 «.0 0.00 0.«« «.04 0.04 4.44 0.0« 0.04 0.0 4.04 4.0 00000000 non-a 4« 0.0« o.«4 4.~« «.04 0.04 0.«0 0.04 0.04 0.04 4.04 0.00 0.44 0.04 0.04 0.04 0003440 000 4003444: 0~ 0.004 «.004 0.0a «.an 4.0 4.404 4.404 0.44 0.m« 0.0 «.044 0.404 0.0- 0.0« 0.0 04445 00400040 000 04440100 .0040694 00 40409 MHMNWM“ 0004000 ”HMWMMM 0044000 40000 MUMHMHM 0404000 MUMHMMM 0044009 40000 MNMHMHM 0004000 HHMHMMM 0004009 >339: ucuuom co4uoou04m o>4uuwuum 4536.6»ch 40:44:02 cowuoouOum w>wuuwuum 204.000.00.44— Hands—oz cojoouohm gquuuuum 4.0304595 need—402 cameo Ou muuoaxm .m .3 >u4co§u cmomousw Cu manoexm .m .3 3.89.: .m .0 (In... Edd.ln.i E.B, 23:846." :4 00445: 3.5 smash. 43“: 40:44 .3450080 5404.043. 9..» 543 04064.4. :4 3.4095 4.050 45.409: mououm 403445 .43 cosoouor. uo noun: o>uuuouum can nacHEOZIIéé and? 100 factors and tariffs pose a major penalty against U. S. exporters in trade with the European Community, as intra- EC trade is not so protected. Combined effective rates of protection are not the simple sum of effective tariff and effective freight fac- tor protection rates when tariffs are levied on c.i.f. import values. This sum is augmented by the percentage increase in domestic value added per unit of output resulting from tariffs levied on the freight factor com- ponent of total landed input and output unit values to arrive at combined effective rates (see equation 4-10). For example, Table 6.3 reveals that U. S. exporters of millwork and plywood to the European Community confront a total effective protection rate of 43.6. Rates of effective protection from tariffs and freight factors sum to 40.4. The difference between these rates (43.6- 40.4 = 3.2) represents the net subsidy rate accorded to EC millwork and plywood producers from tariffs levied on the freight factor component of total landed import values. A comparison of effective protection rates confronted by the remaining U. S. export sectors in trade with the EC and Japan reveals that foreign domestic productive activi- ties receive, on the average a 1.7 percentage increase in domestic value added per unit of output over the situa- tion which would prevail if tariffs were assessed on the f.o.b. value of U. S. exports. 101 .m.o manna c4 mowuucaoo 00454 034 404 c044oouo4m 40 mwum4 an mucwxcmu wuumspcw map cmospmn mum ms0444404400 one «6402 4400.0 1040.0 4400.0 4040.0 4400.0 00440404400 040. 000. 000. 000. «00. 40 40040444000 4000.0 4mm«.c 1400.0 4«00.c 4400.0 0000 0«m. 000.- 000. 000.: 000. 0004mem comma 4400.0 4004.0 4400.0 4m4«.c A400.0 00440404400 0mm. 044. 000. «44. 000. 40 40040444000 A400.0 4400.. 4400.. 440«.c 1400.0 4000 «00. mmo. 000. 000. 000. 00040004 >444§EEOU sawm04zm :04 oo 04 o o o .4 4 0 0444409 04 4 04 0444409 0404 04 40640444moo o>fluommmm unmfloum . unwflmum soaumamuuoo pms4nfiou .m .D w>4uoommm .m .D o>4uommmm .m .D Hmcweoz .m .D 4424802 .m .5 no make gamma paw .mu4coefiou cmmmousm map .mw4mum @6440: 0:4 404 mm4mm 0044064044 w>440m44m paw Hmcwaoz cmmsumm mco444464400I|.v.m Manda 102 Spearman's rank correlation coefficients and coefficients of correlation between industry rankings by nominal and effective rates of protection in the United States, the European Community and Japan are presented in Table 6.4. Both the EC and Japan exhibit rankings by nominal and effective freight factor rates which closely correspond with the U. S. protection pattern. The simi- larity in freight factor protection rate levels across countries has been established from Table 6.3. These results suggest that freight charges in ad valorem terms do not bear more heavily on U. S. exports than on U. S. imports. The consistency in rankings and rate levels imply a uniformity of the rate-making behavior of liner conferences on inbound and outbound U. S. trade routes. Substantial differences in industry rankings by nominal and effective tariff rates are observed between the U. S. and the EC, as well as between the U. S. and Japan. None of these correlations are statistically significant at the 5 percent level of confidence. When freight factors and tariff structures are combined, only the EC displays a ranking of industries by combined effective rates which is similar to the combined U. S. effective protection pattern. The Spearman's rank corre- lation coefficient between U. S. and EC combined effective protection rates is .893. Freight factor structure is 103 observed to exert an extremely strong bias in the direc- tion of aligning EC and U. S. combined effective protec- tion rate rankings. 6.4 Tariff and Freight Factor Escalation: Empiricaffivi—dEnce Nominal and effective rates of protection stem- ming from United States tariffs and freight factors for twenty-seven commodity groups are presented in Table 6.5. Commodity groups are arranged in the order of their stage in each production process. A detailed examination of the results indicates that nominal tariffs tend to escal- ate by stage of processing for most manufacturing activi- ties. Wool clothing, furniture and tobacco products do not exhibit this pattern of tariff escalation. Effective rates of tariff protection are found to be an increasing function of the stage of fabrication for activities pro- ducing cotton clothing, leather products, wood containers, paper products and nonferrous metal manufactures. Nominal freight factors are found to escalate by stage of fabrication for wool clothing, leather prod- ucts, and nonferrous metal manufacturing activities. The remaining production processes exhibit a substantial degree of freight factor de-escalation and effective freight factor protection rates are not observed to be an increasing function of the stage of manufacture. Only 104 TABLE 6.5.--United States Nominal and Effective Rates of Protection from Post— Kennedy Round Tariffs and Freight Factors by Stage of Fabrication Commodity Group Nominal Protection Effective Protection Freight Freight Tariffs Factors Tariffs Factors Total Tobacco Manufactures Tobacco 21.1 9.6 175.4 -4.0 171.4 Cigarettes, cigars 16.6 5.8 19.8 5.0 24.8 Textiles and Products Wool yarn and thread 26.9 4.9 85.6 0.0 85.6 Wool fabrics 46.4 5.1 87.0 3.4 90.4 Wool clothing 27.0 6.9 30.1 11.7 41.8 Cotton yarn and thread 8.4 9.1 12.3 17.7 30.0 Cotton fabrics 12.2 5.4 25.1 6.9 32.0 Cotton clothing 20.0 5.7 27.1 12.4 39.5 Leather and Products Leather 6.0 6.1 11.5 8.2 19.7 Leather products, excluding shoes 15.7 8.2 36.1 12.9 49.0 Shoes 11.1 7.3 17.5 8.4 25.9 Lumber and Paper Products Sawnwood 0.0 37.0 -3.9 87.1 83.2 Plywood and veneer 12.1 20.0 38.9 29.5 68.4 Wood furniture 6.3 28.4 8.5 48.5 57.0 Wood containers 16.7 24.1 45.3 35.7 81.0 Woodpulp 0.0 17.9 -11.9 80.3 68.4 Paper and paperboard 3.6 12.0 6.1 10.1 16.2 Paperboard containers 6.2 6.4 7.6 6.1 13.7 Nonferrous Metals Primary copper 1.8 2.1 14.2 -3.8 10.4 Cepper rolling and drawing 3.9 2.9 10.8 5.4 16.2 Copper castings 8.8 3.1 15.1 2.5 12.6 Primary aluminum 4.6 5.4 10.7 8.6 19.3 Aluminum rolling and drawing 6.9 4.3 18.0 3.4 21.4 Aluminum castings 11.0 7.1 23.0 11.3 34.3 Iron and Steel Products Pig iron 1.0 28.5 1.0 86.7 87.7 Steel ingots 6.1 24.7 18.1 64.8 82.9 Metal manufactures 8.1 13.1 13.1 19.3 32.4 Average, weighted by OECD imports from: Other OECD countries 9.6 12.9 18.0 25.0 43.0 LDC's 13.2 11.7 24.1 21.9 46.0 105 cotton clothing, leather goods, and aluminum processing activities display total effective protection rates that rise with the stage of fabrication. The inclusion of freight factor structure is found to partially offset the tariff escalation pattern of protection widely held to pose a significant barrier against attempts by low income nations to industrialize. 6.5 Recent Changes in Freight Factor Levels The proceeding analysis is based on freight fac- tor ratios calculated from liner conference rate schedules pertaining to 1974. Empirical findings will be altered to the extent that these rates have changed relative to United States import values. Recent movements in freight factor levels are evaluated by comparing post-1965 freight rate indices relative to import unit value indices for the United States. Freight charges have had the opportu- nity to adjust in response to recent advances in maritime technology, currency realignments and major petroleum price increases that occurred in late 1973 and early 1974. Evidence suggests that ad valorem liner freight charges have remained relatively constant over the 1974-1976 period. Ocean liner, tramp freight and unit value import indices are presented in Table 6.6. The only indicator of liner freight rate charges currently available is complied by the Ministry of 106 4.mmm 0.0mm m.mm4 0.0m4 m.mm4 0.mm4 0.044 5.004 5.m04 0.m04 0.N04 0.004 00040>¢ 04400» 00000 004040040:02 "x00:4 0040> 44:0 440084 .m .0 m.m4m 0.00N 0.004 0.004 m.4m4 N.0N4 0.044 0.004 5.504 m.504 N.004 0.004 00040>< 04400» m.w4m 4.00m m.mm4 4.504 4.4m4 N.0m4 N.m44 0.004 5.504 0.004 4.m04 m.mm 000 I400 v.m4m 4.00m 0.404 m.004 4.4M4 m.0m4 m.v44 0.004 5.504 5.004 0.004 «.004 400m 10400 m.04m 4.00m m.5m4 0.0m4 0.mm4 m.0m4 n.044 m.044 5.004 0.504 0.004 «.404 0:00 I400 0.00m v.40m v.m04 m.mm4 m.0m4 0.4N4 v.m44 5.004 0.004 0.004 0.m04 m.mm 40: I442”. 4x00:4 4304040 40:44 0504 m0m4 0504 M504 N504 4504 0004 0004 0004 0004 0004 m004 00040:4 0040> 44:0 440054 .m .0 0:0 0400 4004040 :4 00:049 4:0000II.0.0 04049 107 .4004 m .AoOH u 00040 0040 cmsumo on 0040444004 no: pun .ucsooom :05400 :0 04400 404:0:44:00 £440: 04> 0000400 :0 00404 40:44 0:0 4044000 00000> :0 000004 4000004 000440> 0:0 M504 0400 .004000 0:44:440 4:05:40>00 .0 .0 4.0.0 .:040:4:0030 0440000 000:4000 000040>o .00405500 40 4:05440000 004040 0044:0 "00040:4 0040> 44:0 440054 .0040 «4000004 000440> 0:0 0504 "044000 44000:04a 0544 2440: .4:050040>00 0:0 :04404000Ioo 0450:000 400 :044004:004O "00040:4 4004040 "0004000 u m0040 000040 044005500 4400 0>40 :4 000:0440 .004004 00 :0 00404 00000> 05044 :0 00000 0.00m 0.00m 0.004 0.0M4 4.444 0.004 0.004 0.004 0.004 0.004 0.004 0.004 00040>< 044000 04044040: 00040 "x00:4 0040> 44:0 440054 .0 .0 N.Nm4 0.0m4 0.040 4.504 0.00 0.05 0.044 5.00 5.00 0.00 5.00 0.004 00040>0 044000 0.004 0.004 0.00N 0.04m 0.00 0.45 N.044 5.50 0.00 0.004 5.00 m.NO4 .000 I400 0.004 4.004 0.4ON 0.504 0.05 0.45 4.004 5.00 0.40 m.N04 0.05 m.N04 .4000 I0400 0.4M4 0.0m4 0.500 0.404 0.00 0.05 m.0m4 5.00 0.00 5.00 5.50 0.00 0:00 I404 0.404 m.0m4 0.5mm m.m44 0.00 0.00 0.004 5.00 0.40 0.55 0.00 0.50 402 I50 mx00:4 4044000 00000> 00400 040 0504 0504 0504 0504 N504 4504 0504 0004 0004 5004 0004 0004 000044000II.0.0 00009 108 Transport of the Federal Republic of Germany. Since the 1974 base period of the present study, the liner rate index and the import unit value index both registered increases of about 28 percent. Recent indices are not available, but freight rate increases are widely publi- cized. Since 1977 cumulative rate increases of 28 per- cent have been announced by the North Atlantic Continental Freight Conference which operates between the U. S. North Atlantic ports and Germany.2 The most recent rate adjust- ment will go into effect in July 1978. Rate increases are intended to offset the declining value of the U. S. dollar in relationship to European currencies. Recent movements in dry cargo voyage charter (tramp) rates are also of interest. Rates are negotiated at the time of shipment and are, therefore, subject to wide fluctuations in response to changing demand and supply conditions. The tramp index presented in Table 6.6 pertains to major bulk commodity groups: iron ore, grain, coal, bauxite and alumina, and phosphate rock. Vigorous growth in the demand for shipping service bid up tramp rates over the years 1973-1974. During these years, ad valorem equivalents of these rates registered a 60 percent increase. Excess capacity resulting from the economic recession of 1975 depressed tramp rates to historically 2”Steamship Groups Set 10% Rate Boosts to European Ports." Wall Street Journal, 12 April 1978, p. 8. 109 low levels. Recent movements in the dry cargo time charter and tanker voyage indices, not presented here, follow a pattern similar to the voyage charter index. 6.6 Conclusion Three sets of empirical results support the con- clusion that the overall level of effective protection afforded by freight factor structure is as large or larger than that afforded by post-Kennedy Round tariffs. Effec— tive protection rates are frequently employed to indicate the direction of protection-induced interindustry resource flows. Combined effective rates are found to infer a pattern of industrial protection and concomitant pattern of resource flows quite distinct from that indicated by effective tariff rates alone. Productive activities operating under low rates of protection from tariffs are observed to enjoy substantial protection from freight factor structure. The exclusion of freight factors from the analysis understates the level of protection for these industries. Freight factors, unlike tariffs, are not observed to escalate by stage of fabrication. Freight factor structure is found to erect a sub- stantial barrier against U. S. exports to the European Community and to Japan. These nations also levy tariffs on a c.i.f. basis, which tends to equalize marginal cost among competing sources of supply in foreign markets. To 110 remain competitive, U. S. producers must reduce Operating costs in direct proportion to the added cost resulting from freight factors and tariffs. This penalty is severe in trade with the European Community, an intra-EC trade is not so protected. The existence of a secondary burden imposed against U. S. exporters from significantly higher outbound freight charges is not confirmed by empirical results. CHAPTER VII TARIFFS, FREIGHT FACTORS AND LABOR PROTECTION IN UNITED STATES INDUSTRIES 7.1 Introduction This chapter tests empirically whether the struc- ture of United States tariffs and freight factors protect labor in manufacturing industries. Empirical investiga- tions of the relationship between U. S. protection rates and labor intensity have been conducted by Vaccara (69), Balassa (4), Basevi (9), and Cheh (16). Two features of the present study are unique. First, the analysis is expanded to include freight factor protection rates. Freight factors account for a large part of the total protection enjoyed by manufacturing activities. Their inclusion is a necessary step in attempts to assess propo- sitions concerning a nation's total protective structure. Second, traditional measures of labor intensity based on direct labor requirements are discarded in favor of the theoretically preferred total labor requirements. 111 112 7.2 Rates of Protection, Labor Intensity and the Leontief Paradox Empirical examinations of the relationship between rates of protection and industry labor use have produced mixed results. Vaccara (69) has provided evidence that a positive relationship exists between nominal tariff rates for United States industries and labor intensity, as measured by either the share of labor income in output value (direct labor cost) or by the ratio of employment to value of output (direct labor use). Studies by Balassa (4) and Basevi (9) did not confirm a significant positive correlation between effective rates of protec- tion on total value added and labor intensity. However, for 1958, Basevi has found a significant negative corre- lation between labor intensiveness in U. S. industries and effective rates of protection on value added by labor. A statistically significant positive relationship between direct labor use and both nominal and effective tariff rates is confirmed by Cheh (16). Vaccara's findings that U. S. nominal tariff rates vary positively with labor intensity is advanced by Travis (50) as one explanation for the Leontief Para- dox. Since nominal tariffs restrict labor intensive imports, Travis argues that U. S. trade policy is respon- sible for Leontief's discovery that a representative bundle of U. S. exports embodied more labor relative to 113 capital than did one of U. S. imports. In the absence of tariffs, labor intensive imports would increase relative to capital intensive imports, establishing the pattern of trade in accordance with the United States apparent com- parative advantage in capital intensive manufactures. According to Basevi, the true measure of protec- tion is given by the effective protection rate, and not by nominal tariffs which ignore the tax influence of tariffs on intermediate inputs. Since no positive rela- tionship has been found between labor intensity and effective tariff rates, Travis's hypothesis is refuted. Cheh (16) has argued that the relevant test for Travis's hypothesis is whether a total measure of protec- tion, including both tariff and nontariff barriers is positively correlated with labor intensity. The analysis is extended to include the restrictive effects of import quotas, the American Selling Price customs valuation system, federal highway subsidies and a variety of fed— eral, state and local taxes.1 Both nominal and effective total protection rates are examined as the former dis- courages domestic consumption of imports, while the latter encourages their domestic production. Although a positive 1The analysis included nontariff distortions whose effects were previously quantified on an industry by industry basis by Baldwin (6). 114 relationship was established between industry labor use and both nominal and effective tariff rates, all statis- tical significance vanished in each case with the inclu- sion of nontariff trade barriers. Results did not support Travis's hypothesis. 7.3 Empirical Test of the Travis Hypothesis Absent in all previous studies is an accounta- bility of protection from freight factor structure. The purpose here is to test Travis's hypothesis by investi- gating whether the combined structure of U. S. tariffs and freight factors is positively related to labor inten- sity. Following Cheh (16), both nominal and effective protection rates will be used in the empirical analysis. Data for protection rates are taken from Table 6.1 of the present study. Industry total labor require- ments, obtained by combining immediate labor use coeffi- cients with the total requirements matrix (Leontief inverse) of the 1970 United States input-output table, 2 serve as the index for labor intensity. Total labor coefficients are theoretically preferred over the simple 2Total labor requirements were computed by Robert A. Brusca for use in an unpublished dissertation at Michi- gan State University. For a discussion on the estimating procedure, and on the similarity between these and immedi- ate factor requirements (factors employed in the final stage of fabrication), see Brusca (13, pp. 25-88, 160-62). The use of total labor requirements was suggested by Travis (51). 115 ratio of employment to output value as a measure of labor content, since the former includes labor requirements of inputs into the process, inputs into the inputs, and so forth. Results of this investigation are presented in Table 7.1. All coefficients on labor use are positive, but in only three cases are they significant. A positive relationship is confirmed between labor intensity and both nominal and effective tariff rates. Higher rates of nomi- nal tariff protection afforded labor intensive industries are not offset with the introduction of freight factors. However, equation (6) reveals no significant relationship between combined effective protection measures and labor use. This finding is consistent with that of Cheh (16). 7.4 The Protection of Unskilled Labor The belief that United States tariffs protect unskilled labor is based on a demonstration by Stolper and Samuelson (48) which shows that in a simple two- sector Heckscher-Ohlin model free trade would reduce absolutely the returns to the scarce factor of produc- tion. Leontief (38) has offered evidence that U. S. export production is skilled labor intensive relative to TABLE 7.1.--Regression Results: Intensity 116 Rates of Protection on Labor Independent Variable Dependent Variable R2 0::::::t::ns Constant Labor Use 1. Nominal tariffs 0.03 1.86* .18 54 (0.54) (3.44) 2. Nominal freight factors 0.08 1.20 .01 54 (1.54) (0.77) 3. Nominal Tariffs and 0.11 3.07** .06 54 freight factors (1.66) (1.85) 4. Effective tariffs 0,04 3.31* .09 54 (1.47) (2.25) 5. Effective freight factors 0.14 3.52 .01 54 (5.87) (0.60) 6. Effective tariffs and 0.18 6.83 .02 54 freight factors (6.36) (1.07) SOURCE: Labor use equals total labor requirements per thousand dollars of value of domestic shipments in 1970 (constructed from U. 8. Bureau of the Census, Census of Population, 1973, and 1970 BLS input-output table). NOTE: Estimated coefficients, followed by standard errors and t-statistics, estimated by ordinary least squares. *Significant at 5 percent level. 117 import replacement production, while the existence of a relatively higher wage level in U. S. export industries is confirmed by Kravis (32). These findings suggest that the United States is both capital abundant and skilled labor abundant relative to its trading partners. Unskilled labor, the relatively scarce factor, will have an incentive to secure tariff protection. If the struc- ture of tariffs is found to protect unskilled labor in U. S. import competing industries and this protection is not offset by the presence of freight factors, the joint influence of both restrictions would contribute to our understanding of the Leontief paradox. Ball's (7) attempt to isolate a positive relation- ship between protection rates and the proportion of unskilled labor in each industry has been severely criti- cized by Cheh (16). From Balassa's (4) study on effective tariff rates for United States industries in 1962, Ball chose thirty-one industries for which data on average wages were available. The rank correlation coefficient between effective tariff rates and the average wage of all employees was found to be -.568, while that between effec- tive tariffs and the average wage of production workers was -.685. Next Ball compared the proportion of skilled workers (defined to include professional, technical and kindred workers, craftsmen and foremen) for 20 two-digit 118 S.I.C. industries in 1960 with the average wage for each industry. The rank correlation between average wage for all employees and the percentage of skilled labor was .94, while that between the average wage of production workers and percentage of skilled labor was .932. He concluded that the average wage is a reasonable index for skill intensity, and since a negative correlation was found between average wage and effective tariff rates, the United States tariff structure must afford greatest levels of protection to unskilled labor industries. The test drew criticism from Cheh (16) for its comparisons of rankings at widely different levels of aggregation. Cheh offered a direct test of the relationship between the proportion of unskilled labor and both nominal and effective tariff and total (tariff plus nontariff) pro- tection rates. At the 10 percent level of confidence, only nominal tariff rates were found to be positively related to the percentage of unskilled labor. Cheh con- cluded that unskilled labor intensive industries were not protected by effective tariff rates or nontariff barriers. Following Cheh, the present study examines the relationship between the percentage of unskilled labor (ratio of total unskilled labor requirements to total labor requirements) and rates of protection from tariffs 119 and freight factors. As in previous studies, unskilled labor is defined to include services of operatives and laborers. Results are presented in Table 7.2. Coeffi- cients for the percentage of unskilled labor are all positive and statistically significant. The positive relationship between rates of tariff protection and percentage of unskilled labor supports Ball's (7) finding but is contrary to that of Cheh. More important, a highly significant positive relationship is isolated between the percentage of unskilled labor and both combined nominal and effective rates of protection. The combined effect of both barriers is found to bear heavily on relatively unskilled labor intensive imports, and can be held par- tially responsible for Leontief's scarce-factor paradox. 7.5 Conclusion Empirical results confirm Vaccara's finding that labor intensive industries are protected by United States nominal tariffs. Effective tariff rates are also found to be higher for labor intensive sectors, but the influ- ence of other trade distorting measures are not taken into account. Cheh's analysis of tariff and nontariff barriers produce results which do not support Travis's argument that by protecting labor in manufacturing activities, U. S. trade policy is responsible for the TABLE 7.2.-—Regression Results of Unskilled Labor 120 : Rates of Protection on Percentage Independent Variable . 2 Number of Dependent Variable % Unskilled R Observations Constant Labor 1. Nominal tariffs —0.01 0.18* .20 54 (0.05) 2. Nominal freight factors -0.02 0.26** .07 54 (0.13) (1.96) 3. Nominal tariffs and -0.03 0.44* .16 54 freight factors (0.14) (3.10) 4. Effective tariffs -0.09 0.43* .19 54 (0.12) (3.48) 5. Effective freight —o,21 0.89* .05 54 factors (0.51) (1.72) 6. Effective tariffs and —0,30 1,32* .10 54 freight factors (0.55) (2.40) SOURCE: Ratio of unskilled labor requirements to total labor requirements: unskilled workers defined to include operatives and laborers (constructed from U. S. Bureau of the Census, Census of Population, 1973, and the 1970 BLS input-output table). Note: Estimated coefficients, followed by standard errors and t-statistics, estimated by ordinary least squares. *Significant at 5 percent level. **Significant at 10 percent level. 121 Leontief paradox. In the present study, freight factor structure iii found to offset the positive relationship between labor use and tariff protection measures. When the assumption of homogeneous labor is relaxed, empirical findings differ substantially from that of Cheh. The present study establishes an extremely sig- nificant positive relationship between the percentage of 'unskilled labor and both nominal and effective combined rates of tariff and freight factor protection. By restricting imports intensive in unskilled labor, the relatively scarce U. S. factor, both barriers can be held responsible for the Leontief paradox. CHAPTER VIII SUMMARY AND CONCLUSIONS Unlike many nontariff barriers, freight factors can be quantified on an industry by industry basis so that the magnitude of the barrier imposed by freight fac- tor structure in international trade can be assessed. Freight factors represent the ad valorem equivalents of liner conference freight rates. While tariffs are a commercial policy variable, the commodity structure of ocean liner freight rates derives largely from product characteristics. Results of Chapter III confirm earlier findings that liner conference rate schedules can be systematically explained by cost and demand factors. The most important single factor accounting for variations in freight rates on individual commodities is found to be the stowage factor, a measure of cost. Conferences are also found to act as discriminating monopolists in charg- ing "what the traffic will bear," but the influence of product unit value as a demand factor in the rate deter- mination process is of secondary importance. Competition from independent tramps and tankers does not appear to influence the level of liner rates. A comparison of the 122 123 liner rate index relative to the import unit value index for the United States suggests that ad valorem equivalents of these charges remain relatively constant over time. Three sets of effective protection calculations are presented in this study. First, rates of effective protection stemming from freight factors and post-Kennedy Round nominal tariffs are provided for fifty-four U. S. import competing industries. A second set of calculations compares rates of effective freight factor protection confronted by U. S. export industries with that afforded U. S. import industries in trade with the nine country European Community and with Japan. The different manner in which tariff and freight factor structures interact under alternative import valuation systems is examined. Lastly, nominal and effective protection rates are assessed for U. S. productive activities by stage of fabrication. Each investigation reveals that the overall degree of protection afforded by freight factor structure exceeds that afforded by post-Kennedy Round nominal tar- iffs. Few productive sectors are afforded high rates of effective protection from both tariffs and freight fac- tors. The ranking of industries in descending order by combined effective protection rates infers a different pattern of protection induced interindustry resource 124 flows and comparative advantage implications than that suggested by an examination of effective tariff rates alone. A comparison of industry rankings by tariff, freight factor and combined rates of effective protection implies that freight factors exert a strong influence in determining the combined pattern of industrial protec- tion in the U. S. (see Table 6.2). Industry rankings by combined nominal tariff and freight factor rates are found to afford a satisfactory indication of this combined effective protection pattern. Whether measured in nominal or effective terms, freight factors are not found to bear more heavily on U. S. exports than on U. S. imports. Furthermore, the United States, Japan, and the EurOpean Community display remarkably similar industrial rankings by nominal and effective freight factor protection rates. When the geographical proximity of trading partners is taken into account, the combined structure of tariffs and freight factors places U. S. export industries at a comparative disadvantage in markets of the European Community nations. Trade among EC members is not so protected. These nations also calculate tariffs on total landed import value. This practice tends to equalize the marginal cost among competing sources of supply in each foreign market. To overcome the barrier imposed by distance as well as the 125 common external tariff, each U. S. exporter must reduce production costs in direct proportion to the added costs resulting from freight factors and tariffs. Freight factors, unlike tariffs, are observed to de-escalate by stage of processing for the majority of product groups under investigation (see Table 6.5). The tariff escalation pattern commonly held to pose a barrier against attempts by develOping nations to industrialize is partially offset when freight factors are included in the analysis. A significant positive relationship is established between the percentage of unskilled labor in U. S. manu- facturing industries and both combined rates of nominal and effective protection from freight factors and tariffs. By restricting relatively unskilled labor intensive imports, the combined structure of tariffs and freight factors can be held partially reSponsible for the Leontief scarce factor paradox. In addition, a large barrier is imposed by freight factor and tariff structure against unskilled labor intensive products that develOping nations might hope to export to the United States. APPENDIX 126 APPENDIX "Cutthroat" Competition: Refers to disasterous rate wars prevalent among shipping lines during the 19th Century. To secure additional cargo, shipping lines engaged in the unprincipled practice of cutting rates below the actual cost of handling and carriage of the particular items concerned. Freight Factors: Freight rates expressed as a percent of commodity unit values. Freight Rates: Freight rates are denominated in U. S. dollars and apply per ton of 2,240 pounds or 40 cubic feet, whichever produces the greatest revenue for the Member Line. Rates apply from the vessel loading terminal at the port of exportation to the vessel dis- charge terminal and do not include charges for clearing merchandise through customs. Long Ton: 2,240 pounds. "Measurement ton" basis: Commodities which occupy more than 40 cubic feet per long ton are assigned rates on a measurement ton (40 cubic feet) basis. 127 128 Stowage factor: Number of cubic feet of ship space occupied by one long ton of a commodity, including packaging. "Weight ton" basis: Commodities which occupy less than 40 cubic feet per long ton are assigned rates on a weight ton (2,240 pound) basis. REFERENCES 129 1. 10. REFERENCES Balassa, B. "Tariff Protection in Industrial Nations and Its Effects on the Exports of Processed Goods from Developing Countries." Canadian Journal of Economics (August 1968): 583-94. , and Associates. The Structure of Protec- tion in Developing Countries. Baltimore: John Hopkins Press, 1971. . "The Impact of the Industrial Countries' Tariff Structure on Their Imports of Manu- factures from Less Developed Areas." Econ- omica (November 1967): 372-83. . "Tariff Protection in Industrial Coun- tries: An Evaluation." Journal of Political Economy (December 1965): 573:94. . Trade Prospects for Deve10ping Countries. Homewood, 111.: Richard D. Irwin, 1964. Baldwin, R. E. Nontariff Distortions of Interna- tional trade. Washington, D. C.: The Brookings Institution, 1970. Ball, D. ”United States Effective Tariff and Labor's Share." Journal of Political Economy (April (1967): 183-87. Barber, C. "Canadian Tariff Policy." Canadian Journal of Economics and Political Science (November 1955): 513-30. Basevi, G. "The U. S. Tariff Structure: Estimates of Effective Rates of Protection of U. S. Industries and Industrial Labor." Review of Economics and Statistics (May 1966): 147-159. Beckerman, W. "Distance and the Pattern of Intra- European Trade." Review of Economics and Statistics (February 1956): 31-40. 130 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 131 Bennathan, E., and Walters, A. The Economics of Ocean Freight Rates. New York: Frederick A. Praeger, PubliShers, 1969. Bhagwati, J. "Fiscal Policies, the Faking of Foreign Trade Declarations, and the Balance of Pay- ments." Bulletin of the Oxford University Institute of Economics and Statistics (Feb- ruary 1967): 61-78. Brusca, R. "An Examination of Several Theories of the Commodity Composition of Trade." Ph.D. dissertation, Michigan State University, 1977. Bryan, I. "Liner Freight Rates on Some Canadian Export Routes." Journal of Transport Econ- omics and Policy (May 1974)? 161—173. Carman, J. R. "Analysis of Ocean Freight Rates by Multiple Regression." Transportation Research Forum (1973): 433-450. Cheh, J. H. "A Note on Tariffs, Nontariff Barriers, and Labor Protection in United States Manu- facturing Industries." Journal of Political Economy (April 1976): 389-394. Corden, W. M. The Theory of Protection. London: Oxford University Press, 1971. . "The Structure of a Tariff System and the Effective Protective Rate." Journal of Political Economy (June 1966): 221-37. Ethier, W. "General Equilibrium Theory and the Con- cept of Effective Protection." In Effective Tarifffigrotection. Edited by H. G. Gruber and H. G. Johnson. Geneva: Graduate Insti- tute of International Studies, 1971. Finger, J. M., and Yeats, A. J. "Effective Protec- tion by Transportation Costs and Tariffs: A Comparison of Magnitudes.” Quarterl Journal of Economics (Feburary 976 : 169- 176. . Ford, A. G., and Webster, J. K. Handling and Stowage of Car 0. Scranton: International Textbook Co., 1952. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 132 Garoche, P. Stowage: Handling and Transport of Ship Cargoes. New York: Cornell Maritime Press, 1949. G.A.T.T. Basic Documentation_for the Tarifijtudy. Working Group on the Tariff Study. Geneva: General Agreement on Tariffs and Trade, 1971. Grubel, H. G. "Effective Tariff Protection: A Non- specialist Guide to the Theory, Policy Impli- cations and Controversies." In Effective Tariff Protection. Edited by H. G. Grubel and H. G. Johnson. Geneva: Graduate Insti- tute of International Studies, 1971. , and Johnson, H. G., eds. Effgctive Tariff Protection. Geneva: Graduate Institute of International Studies, 1971. Hazard, J. L. Transportation: ManagementhEconomics, Policy. Cambridge, Maryland: Cornell Mari- time Press, Inc., 1977. Heaver, T. D. "The Structure of Liner Conference Rates." Journalyof Industrial Economics (July 1973): 257-265. . "Trans-Pacific Trade, Liner Shipping and Conference Rates." Transportation and Logistics Review (Spring 1972): 3-27. Jansson, J. O. "Intra-Tariff Cross Subsidisation in Liner Shipping." Journal of Transport Econ- omics and Policy (September 1974): 294-311. Johnson, H. G. "A Note on Tariff Valuation Bases, Economic Efficiency and the Effects of Pref- erences." Journal of Political Economy (August 1966): 401-2. . "The Theory of Effective Protection and Preferences." Economica (May 1969): 119- 138. Kravis, I. "Wages and Foreign Trade." Review of Economics and Statistics (February 1956): 14-31. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 133 Kravis, I., and Lipsey, R. Price Competitiveness in World Trade. New York: National Bureau of Economic Research, 1971. Kreinin, M. E. International Economics: A Policy Approach. 2nd ed. New York: Harcourt Brace Jovanovich, Inc., 1975. ; Ramsey, J. B.; and Kmenta, J. "Factor Substitution and Effective Protection Recon- sidered." American Economic Review (December 1971): 891-900. Lawrence, S. A. International Sea Transport: The Years Ahead. Lexington: D. C. Heath and Co., 1972: Leeming, J. Modern Ship Stowage. U. S. Department of Commerce, Industrial Series No. 1, Wash— ington, D.C.: U. S. Government Printing Office, 1942. Leontief, W. "Factor Proportions and the Structure of American Trade: Further Theoretical and Empirical Analysis." Review of Economigs and Statistics (November 1956): 386-407. Lewis, S. R., and Guisinger,-S. E. "Measuring Pro- tection in a Developing Country: The Case of Pakistan." Journal of Political Economy (November-December, 1968): 1170-1197. Lipsey, R. E., and Weiss, M. Y. "The Structure of Ocean Transport Charges." In Explorations in Economic Research, Vol. 1, No. 1, National Bureau of Economic Research, 1974. MacPhee, C. R. Restrictions on International Trade in Steel. Lexifigton: D. C. Heath and Co., 1974. Martin, G. Shipmaster's Handbook on Ship Business. Cambridge, Maryland: Cornell Maritime Press, 1969. Marx, D. International Shipping Cartels. New Brunswick, N. J.: Princeton University Press, 1953. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 134 McAleese, D. Effective Tariffs and the Structure of Industrial Protection in Ireland. Dublin: The Economic and Social Research Institute, June, 1971. Moneta, C. "The Estimation of Transportation Costs in International Trade." Journal of Politi- cal Economy (February 1959): 41158. Organization for Economic Cooperation and Develop- ment. Ocean Freight Rates as a Part of Total Transport Costs. Paris,i1968. Shneerson, D. "The Structure of Liner Freight Rates." Journal of Transport Economics and Policy (January 1976): 52-67. Stoper, W., and Samuelson, P. "Protection and Real Wages." Review_of Economic Studies (Novem- ber 1941): 58-73. Thomas, R. E., and Thomas, O. O. Stowage: The PrOp- erties and Stowage of Cargoes. Galsgow: Brown, Son De Fergusion, Ltd., 1968. Travis, W. P. The Theory of Trade and Protection. Cambridge, Mass.: Harvard University Press, 1964. . "The Effective Rate of Protection and the Question of Labor Protection in the United States." Journal of Political Economy (May/June 1968): 443-461. Tumlir, J., and Till, L. "Tariff Averaging in International Comparisons." In Effegtive Tariff Protection. Edited by H. G. Grubel and H. G. Jounson. Geneva: Graduate Insti- tute of International Studies, 1971. United Nations Conference on Trade and Development. Liner Shipping in India's Overseas Trade. New York: United Nations,il967. United Nations Conference on Trade and Development. The Level and Structure ofgreight Ratgg. New York: United Nations, January, 1970. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 135 United Nations Conference on Trade and Development. Unitization of Cargo. New York: United Nations, 1970. United Nations Conference on Trade and Development. Maritime Transport of Iron Ore. New York: United Nations, 1974. United Nations Conference on Trade and Development. World Develgpments in Shipping, Ports and Multimodern Transport. New York: United Nations, March 1977. U. S. Bureau of the Census. U. S. Foreign Trade Statistics: Classifications and Cross Classifications, 1970. Washington, D.C.: U. 8. Government Printing Office, February 1971. U. S. Bureau of the Census. Census of Manufactures, Industry Statistics, Vol. II. Washington, D.C.: U. 8. Government Printing Office, 1976. U. S. Bureau of the Census. U. S. General Imports. Report FT 135, December 1974, Washington D.C.: U. S. Government Printing Office, 1975. U. 8. Bureau of the Census. U. S. General Imports/ Schedule A/Commodity Groupings by World Areas. Report FTISO, Annuali1974. Washing- ton, D.C.: U. S. Government Printing Office, 1975. U. 8. Bureau of the Census. U. S. Impprts for Con- sumption and General Imports. Report FT 246, Annual 1974, Washington, D.C.: U. S. Govern- ment Printing Office, 1976. U. S. Bureau of the Census. U. S. Exports/Schedule B. Commodity Groupings by World Areas. Report FT 450, Annua1'1974, Washington, D.C.: U. S. Government Printing Office, 1976. U. S. Department of Commerce. Input-Oupput Struc- ture of the U. S. Economy, 1967. Vol. 3, Wa§hington, 510.: U. S.iEOVernment Printing Office, 1974. 65. 66. 67. 68. 69. 70. 71. 72. 73. 136 U. S. Department of Commerce/Maritime Administra- tion. Containerized Cargo Statistics: Calendar Year 1973. Washington, D.C.: U. STiGovernment Printing Office, 1976. U. S. Department of Commerce/Maritime Administra- tion. Essential United States Foreign Trade Routes. Washington, D.C.: U. 8. Government Printing Office, 1975. U. S. Tariff Commission. Tariff Schedules of the United States Annotated (1975). iTC Publi- cation 706, Washington, D.C.: U. S. Govern- ment Printing Office, 1974. U. 8. Tariff Commission. Trade Barriers: Repgrt to the Committee on Finance of the United States Senate and its Subcommittee on International Trade. Washington, D.C.: U. 8. Government Printing Office, April, 1974. Vacarra, B. N. Emplgyment and Output in Protected Manufacturing Industries. Washington, D.C.: Brookings Institute,‘I960. Waters, W. "The Protection Effect of International Transport Costs." Ph.D. dissertation, The University of Wisconsin, 1969. Wipf, L. J. "Tariffs, Nontariff Distortions, and Effective Protection in U. S. Agriculture." American Journal of Agricultural Economics (August 1971): 423-30. Yeats, A. J. "An Analysis of the Effect of Produc- tion Process Changes on Effective Protection Estimates." Review of Economics and Statis- tics (November 1977): 81-85. . "Effective Protection in the United States European Economic Community, and Japan." Quarterly Review of Economics and Business (Summer 1974): " “ m3 I‘ll 3 9 2 1