Part 19

The cartelist appears to believe that the way to engage in foreign trade is to have a conference--a kind of Alice in Wonderland mad tea party. At this conference the world is divided up; markets are allocated; and, if he is fortunate, an American enterpriser will be given some business. At the end of the conference he can telephone his office and say “Men, we have been given the Shangri-La market; it’s all ours.” Sometimes the cartelist sounds as though he were too lazy to attend the conference himself. He wants his Government to go for him. He wants the Government to tell him what to do, what markets he can have, and what he can sell. One gets the impression that foreign trade is conducted in an armchair, that it is better if you can get the Government to do it for you, and that it does not make much difference what you have to sell.

This kind of thinking is dangerous. It is a denial of the principle of private property with the profit reward for private initiative and risk taking. Foreign trade presents special problems, but it is none the less true in foreign as well as in domestic trade that if you want to sell you have to make a product the consumer wants to buy. In the development of the foreign market there is no panacea, no easy substitute for ingenuity and efficiency. We cannot expect the foreign consumer to adjust his desires to whatever it is we want to sell. We have to make the kind of a product he wants to buy. The truth of the matter is that many of the large concerns that have made cartel agreements have not been particularly anxious to sell in the foreign market. They have been more anxious to keep independent enterprise in this country from gaining access to foreign markets than they were to sell themselves. As a consequence we must frankly admit that in many industries, American enterprise has not shown the competitive alertness it has at home. If it does not show competitive alertness, it does not deserve the business. And you cannot find a substitute for competitive alertness in an armchair cartel conference or even in an intergovernmental cartel conference.

The cartel conference is a kind of legislature, imposing hidden taxes on consumers and bestowing bounties on others, without the necessity for disclosure or responsibility to any electorate. It is truly a method of imposing taxation without representation. This is true in every cartel case. Some time ago it was fashionable to scoff at international relief or development projects as being international WPAs. Americans were asked rhetorically whether they wished to take care of inhabitants on some other portion of the globe. But no relief scheme has ever been imagined, and no one would dare to present it, which could begin to compare with the international relief societies maintained for themselves by the international cartels. Gigantic sums are drained from the American consumer each year and given outright to domestic monopolists and to foreign companies operating in protected markets. When it is urged that American companies should be allowed to join with foreign cartels in order to promote foreign trade, it should be remembered that what is there called foreign trade is in reality a gigantic relief enterprise supported by the American consumer. I can illustrate this with an example taken from one of our earliest cartel cases.

The story begins prior to the First World War with the discovery and development in Germany of a way of making synthetic nitrate of soda by taking nitrogen out of the air. Prior to that discovery, the world was dependent upon Chile for its nitrate of soda for use in both fertilizer and the making of munitions. The discovery of this new way of making nitrate of soda changed the history of the world for it made it possible for the Germans to wage war without depending upon a raw material to be found only in the Western Hemisphere. It is probable that if synthetic nitrogen had not been discovered, the Germans could not have been able to go to war.

The Allies at that time were dependent upon Chilean nitrate of soda, and as a military matter, this dependence made the Allied position in the first years of the war exceedingly precarious. The Germans knew that Great Britain could not stay in the war for any considerable length of time if it were cut off from its only source of nitrogen, and accordingly in 1917, the Germans set up a blockade outside of Valparaiso. The first attempt of the British to break this blockade was unsuccessful, but the blockade was finally removed as a result of the battle of the Falkland Islands when Admiral Von Spee was defeated. As an economic matter, this dependence of the Allies upon Chilean nitrate of soda was, of course, good for Chile. The United States in 1917 and 1918 purchased almost four million tons of nitrate from Chile; we paid on the average of about $82.50 per ton. At one time, the price rose to $150.00 per ton. In those days, Chile had a unique product, a natural monopoly, and we had to pay for it. The First World War gave to Chile the chance to receive large revenues on a valuable asset, but the First World War also created a situation where in the days to come that asset would depreciate enormously.

The asset of Chilean nitrate of soda was depreciated enormously because all of the important countries of the world, including our own, began to produce synthetic nitrate of soda. Chile no longer had a natural monopoly safe from effective competition. The producers of synthetic nitrate of soda began to compete with each other and with the Chileans. In order to remove this competition they formed a cartel.

The cartel was formed in 1926 and by 1938 it had reached its full growth. The cartel was dominated in Europe by the so-called DEN group, composed of Imperial Chemical Industries, Ltd. for the British, Stickstoff-Syndikat, controlled by I. G. Farbenindustrie for the Germans, and Norsk Hydro for the Norwegians. The European end of the cartel formed an international company in Switzerland to handle the cartel affairs, and thus to represent the thirty-five principal European producers. By special agreements the cartel was extended to cover the Chilean producers of natural nitrate, and I am sorry to say, the important American producers as well. The cartel was an international combination to restrict production, maintain prices and to allocate territories. The world was divided up into special zones of influence; quotas were assigned, and sales in forbidden areas or above the allowed quota resulted in the assessment of penalties. Mexico, for instance, was allocated to the German producers. The American producers were required to refrain from exporting to certain areas. The Barrett Company could not sell substantial quantities of nitrate of soda into foreign markets reserved for the Chilean producers. Du Pont was kept from selling a nitrogenous product in the Philippine Islands. This was not an international trade agreement; as is true with all cartel agreements, this was an agreement to restrict trade.

The cartel agreements covered the American market. Imports by a foreign company to this country had to be included in determining whether that company had exceeded its quota of the world market. American companies were restricted in their exports and to some extent in their production. And sales in the American market, whether for Chilean, European or American producers were at agreed upon prices. An elaborate system of distribution was worked out and adhered to so that these agreed upon prices could be maintained down through the wholesalers and retailers. The cartel thus reached down and touched the American farmer buying in the country store.

Now nitrate of soda is important to the American farmer as are the other fertilizer nitrogen products which were covered by this cartel. In 1937, approximately 700,000 tons of nitrate of soda were imported from Chile for distribution to the American farmer. If there is a cartel in fertilizer nitrogen, it is the American farmer who pays. And he has paid in millions of dollars--a hidden tax to the foreign and domestic producers.

Production was restricted and prices were fixed by this cartel. Some of the higher prices went to Chile; some of them went to our own producers and abroad. The consumer, who in this country happened to be the American farmer, paid a tax in the form of higher prices to keep this cartel going. He did not know he was paying this tax. He did not have the opportunity to elect a representative who might have been for or against this tax. And yet, out of every dollar the farmer paid, a part of it was an involuntary offering to the cartel.

And what was the good from all of this? A hidden tax was collected; purchasing power was destroyed. And all of this was done so that productive capacity could go unused. Out of the hidden tax paid by the American farmer, only a part of it went to the Chilean companies; a good deal of it went to American and European producers.

Whenever the argument is made that a cartel supports a distress industry, the complete answer is that it would be cheaper and better to make an outright gift, raised, if necessary, by lawful general taxation through the Congress. It would be cheaper because consumers would not be required to pay an additional amount to those who are not distressed as they have to do when the cartel keeps the general price up. It would be better because if it were a gift, it would not be raised from only one group of consumers, as in this case, the farmers. It would be better because the contributors to the gift fund would have some chance to know what they were doing and to decide whether they wanted to do it. Nor would the gift be as likely to disappear under the burden of an inefficient method of production as is the case with the hidden tax which is collected every year and which imposes no incentive upon the monopolist to change his ways. You cannot expect the monopolist to change his ways when he can collect a hidden tax every year. No doubt after this war, it will be argued that synthetic nitrogen capacity should go unused by agreement between the large companies. We should remember that if this is done, as with all cartel agreements, there is a hidden and unlawful tax; in this case it would be the American farmers who would pay.

I do not revive this synthetic nitrogen story in order to make charges, but merely as a specific illustration of the way cartels operate. The actual cases are the best answers to the argument that cartels promote trade. The synthetic nitrogen cartel was typical in many ways. The particular occasion for the birth of this cartel was the development of a synthetic process which threatened to destroy the capital value of a natural product. After this war, there will be many new processes whose existence will destroy old capital values and which can be looked upon either as keys to open the doors of new opportunities or as occasions for restrictive agreements. The synthetic nitrogen cartel brought together producers fearful of each other’s productive capacity. As is true in almost every important cartel, the restrictive agreements might have had important military consequences, even though many of the private producers were only thinking in terms of a peace-time market. And finally, this foreign cartel, as is so frequently the case, bred a domestic cartel.

The effect is far-reaching both politically and economically. You can never deal with just one cartel separate from the others because the cartel world is an intricate and interrelated maze. Thus the foreign participants in the nitrogen cartel include the German I. G. Farbenindustrie and the British Imperial Chemical Industries--each a member of a variety of world dividing cartels. The American producers, whether they knew it or not, were entering into an international game to divide markets in which every market and every type of product was involved if the full scope of the cartel agreements of their partners were revealed. They were dealing in secret international diplomacy.

In many cases they were in reality dealing with foreign governments, despite the fact that it has not been the policy of this country to have the conduct of our foreign affairs in private hands. Since 1799 an Act of Congress has prohibited every citizen of the United States, without the permission of the Government, from carrying on any written or verbal correspondence or intercourse with any foreign government with an intent to influence the measures or conduct of any foreign government in relation to any disputes or controversies with the United States. Quite apart from whether this criminal statute is applicable, its spirit would deny to any citizen the right to barter away the trade of the United States by agreement with a foreign government.

One need only think of the possible disastrous effects of permitting Germany to build up a monopoly position in Latin America. The economic effects grow like a snow-ball. Thus in the instance of the synthetic nitrogen cartel, the American consumer lost purchasing power; that meant that American producers could sell less and could therefore buy less. The Chileans received only a portion of the amount of money taken out of purchasing power, but the related cartels operate in Chile, such as the chemical cartel of which both Imperial Chemical Industries and du Pont’s are members. And these cartels do the same thing to Chile that the synthetic nitrogen cartel did to us. Economic life is so related today that you cannot restrict one part and not have almost endless repercussions. For instance, if American movies should be kept out of foreign areas, the effect is immediate on all kinds of American products which are advertised continually through the medium of the motion picture. If the motion picture producers enter into a cartel agreement, they are restricting a good deal of American trade in addition to their own.

What then is the solution? There is no solution if the problem is how can you have American firms enter into foreign cartel agreements but not restrict American trade and commerce. It is surely no solution to say that in the future we will have the governments enter into cartel agreements for us. As an economic matter, it makes no difference whether an agreement to restrict trade is private or governmental. As a political matter, I would agree that if we are going to have such agreements, with their widespread economic diseases, they had better be the responsibility of the government, if only because, the government which makes such agreements can be changed by the voters. But I would suggest that effective governmental control over such agreements would require such a degree of interferences and surveillance over private industry as to place in great jeopardy our own free enterprise-private property system. The history of attempts to control cartels by legalizing and controlling them is not particularly inspiring. Germany is one example.

There is not any one solution because there is not just one problem. There are many things which must and can be done if this country is to encourage foreign trade.

_First_, we must encourage domestic research. Any country which wishes to engage in trade and commerce in the future industrial era must develop its own laboratories and encourage its own domestic research. It has sometimes been suggested that the reason why some of our larger American companies entered into agreements to stay out of important markets such as Latin America was because such was the price they had to pay to get the benefits of European research. It has sometimes even been suggested that we have been dependent upon European research acquired in this manner for many of the important developments which have helped us in this war.

There will probably always be a certain amount of obscurity about this claim that we are dependent upon European research. The files of some of the Antitrust Division cases, however, indicate that even though German firms may have been bound under their agreements to make their research available to their American friends, in many important instances they did not do so. In any event, I think we would agree that it is of the utmost importance that American firms be able to stand on their own feet, and that they should not be dependent upon research from abroad. It has been quite natural, of course, for European research to be in advance of our own in some fields. But failure to develop our own laboratories and our own scientists would be criminal negligence.

I suggest that we ought to have an impartial and searching survey begun as soon as possible as to American research facilities and the state of American research. This is not a matter which concerns only our foreign trade. It goes to the very heart of our future domestic well-being.

Of course, I do not mean to suggest that we should cut ourselves off from European research. There is every reason to believe that research in the future will be truly international in the sense that a partial discovery in England will be supplemented by work done in France or in this country. Possibly some inter-governmental agency can be developed which will act as a kind of international clearing house in order to speed the development of common research carried on in separate areas. It is likely that private institutions in this country and the government itself, as suggested by Senator Kilgore, could aid in the performing of this function. If a study were made of our own domestic research facilities, I would expect that out of that study a recommendation might well come to set up some kind of an international clearing house for research.

There is a further step we can take. The research which has been developed in Germany during the last ten years under the Nazi regime is research which in right belongs to the people of the United Nations. It was Nazi government sponsored research used for the purpose of making war upon us. It is research which should now be put to use for the general good of mankind. It should not be considered as belonging to private hands either in Germany or elsewhere. The United Nations should make sure that steps are taken to make available this research so that it can be used generally.

_Second_, we must remove, through inter-governmental action, the waste and misuse of resources which occur when industries cannot compete and are artificially maintained. It will be much cheaper for this country to offer transitional credit to be used to develop new industries than to continue paying hidden taxes which don’t accomplish anything. We should set up an international mechanism whereby substantial credit can be made available to other countries upon such terms as will encourage the readjustment of the use of their resources so that these resources can be employed, without the crutch of a trade barrier, in the free trade of the world. Consistent with this aim, we can urge also the adoption of minimum wage and health standards so that labor exploitation does not become the means of providing a hidden subsidy for industry in countries having substandard labor conditions.

_Third_, it is, of course, imperative that this country make known its determination to encourage foreign trade and to make it possible for American firms, large and small, to bring their goods to the consumers who will buy. Through vigorous antitrust action, we can break up the activities of a great number of foreign cartels. And American firms are perfectly capable of engaging in vigorous competition with the old monopolistic companies of Europe. Where American industry is competitive at home, such as the automobile industry, there is no way a foreign company effectively can keep out American goods, and foreign consumers would be the first to object if that were tried. It is the industries which are monopolistically dominated at home which seem to have the greatest difficulty. I suspect, however, that in those industries there are smaller firms who will be glad to have the opportunity of selling abroad.

_Fourth_, we should stand ready to help create an international forum to which countries denied access to raw materials or allowed to purchase them only on the basis of monopolistic prices can go to present their case. This does not mean that we should take part in any international control of business, but it does mean that for those few areas where monopolies continue to persist, we must create a world where there is a remedy within the structure of the peace. Many of these raw materials no longer have their former importance. Poetic justice may come to rubber, quinine and eventually to diamonds. Persistence in monopoly prices usually stimulates the development of a substitute. The international forum which I urge will probably not have to hear too many cases. The power of competition has grown more powerful during the war because of the development of myriads of substitutes for the key raw materials.

The opportunities are tremendous. The tools needed for the job are the productive facilities and materials which we will have in abundance. We can play our part with energy and initiative; we would not have it otherwise. We believe in competition, and we are ready to compete. We are ready to engage wholeheartedly in rebuilding a world of peace in which every man and every country can have a stake. We know that we cannot maintain, let alone advance our standard of living save upon the basis of an active and expanding international trade. Our expanding trade will enlarge the area of the interests which we have in common with other peoples, and for us, as well as for them, will narrow the intensity of our differences. And we will have played our part in foreign trade in such a way as to preserve the symbol of our political and economic democracy.

APPENDIX I

_Recent Cases_

The most effective weapon presently available for combatting the influence of monopoly and cartel-minded international groups is vigorous enforcement of the antitrust laws. Congress has recognized that the natural effect of competition is to increase commerce--to extinguish or prevent the free play of competition is to hinder commerce. As was stated by Mr. Chief Justice Stone in the _Trenton Potteries_ case:

“Whatever difference of opinion there may be among economists as to the social and economic desirability of an unrestrained competitive system, it cannot be doubted that the Sherman Law and the judicial decisions interpreting it are based upon the assumption that the public interest is best protected from the evils of monopoly and price control by the maintenance of competition.”

By passage of the antitrust laws, Congress has expressed the American policy of free competition not only in interstate trade and commerce but also in our foreign trade and commerce. The provisions of Section 73 of the Wilson Tariff Act further exemplify this doctrine with specific reference to imports to this country. Section 11 of the Panama Canal Act prohibits passage through the Panama Canal of ships owned or operated by persons doing business in violation of the antitrust laws. Thus, the practices of foreign cartels, involving elimination of competition and collectivization of industry, are inconsonant with the basic concepts of our antitrust laws and national economic policy. The type of arrangements which are the cornerstone of European cartelization, such as agreements dividing markets, allocating customers, controlling production and prices, and apportioning business have all been long declared to be in violation of our antitrust statutes by the courts.