Document 0g4Xo9O5ae58vLX2kREwdZO4V

TELEPHONE HUDSON 3-6126 Manufacturing Chemists' Association, Inc. (FOUNDED 1872) 1825 Connecticut Avenue, N. W. Washington, D. C. 20009 MINUTES OF MEETING White PLASTICS COMMITTEE The Greenbrier Sulphur Springs, West June 8, 1967 Virginia PRESENT: ^essts G. L. Pitzer (Chairman), Union Carbide Corporation T. B. Nantz (Vice Chairman), B. F. Goodrich Chemical Company C. E. Brown, Sinclair-Koppers Company W. J. Dugan, General Electric Company J. W. Ferguson, Hooker Chemical Corporation D. M. Gallagher, Canadian Industries Limited W. C. Goggin, The Dow Chemical Company W. D. Holland, American Cyanamid Company J- F. Kroeger, Shell Chemical Company C. M. Neher, Ethyl Corporation F. M. Norton, Allied Chemical Corporation W. C. Roher, Gulf Oil Corporation A. F. Giacco (for J- R. Ryan), Hercules Incorporated H. C. Wechsler (for E. J. Sullivan), The Borden Chemical Co. D. C. Williams, Eastman Chemical Products, Inc. John Brooks (Board Liaison), Celanese Corporation F. H. Carman (Secretary), MCA and F. J. Pizzitola (Guest), Celanese Corporation In opening the meeting. Chairman Pitzer welcomed new Committee members nominated by the Plastics Committee in its last meeting and appointed by the Board on June 7. In keeping with the Committee's proposal of May 4, 1967, members are appointed to the Committee at this time for a two or three year term for a total membership of 15. This will permit 5 to be replaced each year in compliance with the rotation provisions in the Terms of Reference. As directed by the Committee, the Chairman and Secretary have selected new members to serve as indicated: l _ __ ___ CMA 078771 2 7 Years 2 Years C. E. Brown (Sinclair-Koppers) W. J. Dugan (General Electric) D. M. Gallagher (Canadian Industries) W. C. Roher (Gulf Oil) The ninth nominee designated by the Committee has not available. If it later develops another nominee should be cted, the Committee agreed this should be handled by a letter Financial Package Expenditures for the fiscal year just concluded were thin $200 of that listed in the report cleared to member repre5entatives with the proposed budget on May 19, 1967. The surplus ;n June 1 was $20,920. joatherability Project During the month of May, the project was staffed by the :wo Research Associates, two technicians, and V. E. Gray, director ;f the project for NBS, who is continuing to devote half his time :o the program. Tests on films in controlled atmospheres and on outdoor exposed samples are being continued. Technical represent atives have been urged to visit the lab to follow through on the procedure for atmospheric testing, and four have already commented in writing on this new development. One company's representatives are planning to visit the NBS early in July, and it is anticipated others will be following shortly. No firm decision has yet been cade, although it is quite possible that one of the Research Asso ciates can be replaced by a technician later in the fiscal year. In the discussion of this activity, question was raised on future of the program as to whether or not it would be concluded at the end of the new fiscal year or must be continued. It was the consensus that this be given priority attention by the Steering Cornroittee and the Plastics Committee during the coming months. Discus sion of this will be started in the Liaison Committee meeting at the Bureau on June 16. i_demiologic Investigation - PVC Twenty companies (two non-members of MCA) have been assessed 4 total of $80,350 ($78,600 on hand) for this study at the University CMA 078772 \ 3 -iU9arl s Institute of Industrial Health. The program was a st Relayed getting under way, and the contract has been j to August 31, 1967. By the end of June, the Institute >dseeJltatives will have visited all plants, possibly with the re tion of two units out on strike. During July and August, I*'cep jjpect to complete examination of all X-rays and tabulation -:,ey ""ladings. This will be reported through regular channels , f*n . - ^ member companies, and it is quite possible a symposium will ; ' he scheduled. -en ial Industrial Conference Board This Board's conference on "Plastics: A Management ,einina" May 18, 1967, included excellent speeches by Robert K. (Monsanto), Arthur J. Warner (DeBell & Richardson), and ury C. Hufbauer (University of New Mexico). Some of the high,ghts of Mr. Mueller s talk were reported by the Secretary, opies of these speeches are included with these minutes. .. r, - Plastics in Building and Appliances The Committee was reminded of research sponsored at the i on plastic materials in building and electrical appliances, pertinent reports on this include "Survey of Information on Toxic ity of Combustion and Thermal Decomposition Products" (U/L Bulletin dumber 53, July, 1963), "Burning, Arching, Ignition, and Tracking if Plastics Used in Electrical Appliances" (U/L Bulletin Number 55, February, 1964) , and "Study of Smoke Ratings Developed in Standard Frre Tests" (U/L NC493, May 15, 1964) . This research and the con tacts of industry technical representatives with the Laboratories' staff have resulted in the U/L having a better set of tests and a tew understanding of the qualities of today's plastics which ws re found to be much better than they had believed prior to these studies. There has been a distinct improvement in the cooperative relationship between the U/L, the material suppliers, and the end tsers of plastic products. It is anticipated an industry advisory iroup (material producer representatives) of the U/L will be con7ened in the early fall to review and finalize a report on tests and operating procedures. Members' attention was called to reports emanating from Wayne state University on evolution of HCN during burning of ABS plastics. Professor Irwin Einhorn was reported to be conducting this work. It was agreed the Washington office would consult with technical representatives for further information on the liaison ^dustry is maintaining with this group at Wayne State. CMA 078773 4 university of New York A request for advice on a curriculum on plastics techlo<3Y wa$ rePortec^ by the Secretary. Following a short discus1 l0n, it was recommenJded3 Jt-hU a-- 4t- this be referred to1 -- _ C---------------------3 J D-- r. T-E. -- ric Bae,,r, ^rector of the MCA project at Case Institute, for assistance. Harbors Arrangements Committee The Committee suggested that the following individuals -efve on t*le Arrangements Committee for this meeting September 6-9: diehard Fleming (Avisun) , A. F. Giacco (Hercules), W. D. Holland (j^nerican Cyanamid) , A. R. Ludlow, Jr. (U-S. Industrial Chemicals), 3nd A- A. Pavlic (duPont) . This group is to elect its own chairman. During discussion of subject matter for the business meeting, it was suggested this Arrangements Committee consider: (1) A business forecast discussion by Ira Ellis of duPont; and (2) Status 0f the GATT Negotiations, particularly an analysis of results and probable effects on domestic industry and its foreign operations. ******** The dinner meeting was attended by 146 representatives from Plastics Group participating companies and 27 representatives of other MCA members. Among other announcements, the Chairman, in behalf of the Plastics Group, expressed appreciation to R. G. Askew (Phillips), H. H. Bible (Monsanto), E. S. Ebers (Uniroyal), J. W. Ferguson (Hooker), w. C. Goggin (Dow), G. M. Hale (Shawinigan), and F. M. Norton (Allied), who had completed their terms on the Plastics Committee. Respectfully submitted, F. H. Carman, Secretary Plastics Committee FHC/bk Enclosures (1) NICB Conference Speeches. (2) Plastics Committee Roster 1967-68. cc; All Present Plastics Committee June 19, 1967 CMA 078774 Manufacturing Chemists' Association, Inc. PLASTICS COMMITTEE ROSTER 1967 - 1968 irfflSG^>^7 Pitzer ;;enjVc products Division '3S carbide Corporation :;park Avenue , York, New York 10017 Vice Chairman Thomas B. Nantz B. F. Goodrich Chemical Company 3135 Euclid Avenue Cleveland, Ohio 44115 '''ster E. Brown ! :'^laj_r-Koppers Company | '::','WKoppers Building ^rsburgh, Pennsylvania 15219 John R. Ryan Polymers Department Hercules Incorporated Wilmington, Delaware 19899 , j_ Dugan ^eraical Materials Department "_gneral Electric Company ",,e plastics Avenue j-ttsfield, Massachusetts 01201 ,, m. Gallagher Mastics Division -jnadian Industries Limited :,0. Box 10 Montreal, Quebec, Canada 4. D. Holland plastics & Resins Division American Cyanamid Company ! ?.0. Box 425 j Wallingford, Connecticut 06493 .':hn F. Kroeger Plastics & Resins Division Shell chemical Company ( 113 W 52nd Street j lew York, New York 10019 * 3. M. Neher Polymer Division Ethyl Corporation p-0. Box 1466 Baton Rouge, Louisiana 70821 WiUiam C. Roher Chemicals Department Culf oil Corporation P-0. Box 8200 *knsas City, Missour 64105 Roy L. Schuyler, Jr. Plastics Department E. I. du Pont de Nemours & Company Wilmington, Delaware 19898 E. J. Sullivan The Borden Chemical Company 350 Madison Avenue New York, New York 10017 D. C. Williams Plastics Division Eastman Chemical Products, Kingsport, Tennessee 37662 Inc. Robert E. Workman Chemical Division Goodyear Tire & Rubber Company 1144 E Market Street Akron, Ohio 44316 Board Liaison John Brooks, President Celanese Corporation 522 Fifth Avenue New York, New York 10036 CMA 078775 f the Press 04-S Third Avenue, New York, N.Y. 10022 Area Code 212 PLaza 9-0900 |0nal industrial Conference board ^^ase After 9:30 a.m. (EDST) Thursday, May 18, 19^7 Conference Release KEYNOTE ADDRESS A talk by Robert K. Mueller Vice President, Monsanto Company at a special one-day meeting on "Plastics: A Management Dilemma" conducted by the National Industrial Conference Board Thursday, May l8, 19^7, in The Waldorf-Astoria, New York City Thank you, and good morning. It is good to see that so many are interested in the plastics industry. I -ess we all like to hear that others have problems, too. Oscar Wilde once said .-en asked about his new play -- "The play was a great success but the audience was ifailure:" With the fine turn-out this morning and our distinguished panelists we :an't help but get a good review of the exciting dilemma that management now faces m the plastics industry. Last year there were 43 U. S. plastics molding and fabricating company :-siness failures, and 19 mergers resulting from the economic, technical, and market shifts taking place. Mergers were also occurring at a rate of about 80 per year in he chemical industry during 1966. This churning and turmoil has been going on at ^ch this same tempo for some time in the plastics and chemical industry. In fact, U. S. manufacturers of molded and fabricated plastics products have bit the dust ln the last 10 years, representing about $50 million liabilities. Despite these Alness tribulations, the last thirty years of scientific effort in plastics have ^elded such sophistication in the disciplines involved - chemistry, physics, (more ) OMA 078776 A talk by Robert K. Mueller 2 The Conference Boar J engineering, styling, and merchandising - that the plastics industry has substantial ly altered the raw material index of our times. Why then, with these great technic*} advances, is there a management dilemma facing us today? Those of us who experienced the nitrate plastics heyday have seen that actor of the industry displaced with entirely new materials, ranging from the r.proved cdlulosics to the vinyl family. Another instance - vinyl resins have nearly supplanted the old jute and linseed oil compositions and rejuvenated the floor covering business. A stream of plastics developments has created new business and new products, in some cases at the expense of other materials. But, more often, entirely new compositions have been developed to add to or enhance the materials of construction available to us. All of this development has taken place, and, yet, there are troubles brewing. Recently, the London Economist characterized the chemical industry in a manner which can be paraphrased for our plastics industry only too well. It's "like an enchanted forest. Delicious little paths curve away invitingly into charming little glades; the addict wanders on, entranced, unable to resist each fresh delight, ,f man; atinB make o' assist* growth can si: manage: manager efforts until he finds himself lost and starving. Indeed, so vague are the industry's boundaries it is possible to invest in anything and still remain with it!" The ubiquitous nature of the industry is both its salvation and the source of the management dilemma. And we find ourselves at a number of crosspaths in this wonder woods. Some managements decide to leave the woods. Recently, Distillers Company Ltd., a beverage producer with substantial chemical interests, sold off its plastics and chemical subsidiaries to British Petroleum Company Ltd., and now confines its affairs to the original whiskey business. decisic manager to con encoun the wo however best sy But why leave the enchanted forest? Having spent most of my working years in the plastics field, I cannot believe that this was a misspent youth, or that it determi industr is an unattractive industry -- for either the investor, the manager, the supplier, (more ) tare sti CMA 078777 by Robert K. Mueller - 3- The Conference Board lat re \e is iness often, Is of et, na "like ource this its years - it er, be customer. The industry has by and large performed in good style in coping h continual technical advances. What we've got to do now is to learn to manage ell as we make. ^ Management Dilemma It was Aristotle who first used the metaphor "horns of the dilemma" to ,,..atize the discomfort of decision-making. Today we have improved skills and tools ;!i,anaserient to help relieve this discomfort when we make decisions in this fascin,itjg plastics business - if we learn to use them as tools and don't expect them to ,:<e our derisions for us. In the scientific end of our business it has taken brains, fisted by all the tools and machines available to give this industry its fantastic Now that we have come of age we certainly have the brains, and certainly, we an also use the new management tools that have become available to the business manager - and I'm not selling computers: I am selling a realistic, common sense -yiagement approach to some perplexing problems which call for our best management i ?:`forts as distinct from our technical efforts. Let's face it - the uncertainties in the industry require continual :ecision-making as to which plastics markets to select for profitable direction of -nnagement time and money. Competing in these markets involves not only facing up 3 consumer caprice but to Free World competition at a turbulence level never before 1 ^countered in the plastics business world. Of course, the complexity varies around `-.e vorld with different economic, political, and cultural settings. These dilemmas, cwever, present a challenging opportunity for the management-minded to employ the cest systems and techniques which are now available. Some - notably Professor Galbraith - argue that the efficient producer determines what the consumer will have. This is simply not true in the plastics mdustry. in the all-pervading plastics business the consumer and the market economy ar still enthroned. The technically-minded plastics industry must now turn its I CMA 078779 A talk by Robert K. Mueller -k- The Conference Boar$.5 talents to decision-making in the complex commercial area, where the art and science of management is not so well developed as the science of manufacture and research in the physical world of plastics. The plastics industry has already profited from the science of manufacture. Now it has a mandate to cash in on the science and art of management. Our challenge is to manage as well as we make. Anatomy of the Industry 'The discussion this morning is in two parts - one in which our industry does very well, and one in which our industry needs to do better. What do we do well? We have an outstanding record of technical achievement and growth -- witness the many dramatic uses of plastics in the Mercury spacecraft nose cones, Detroit's vinyl-covered hardtop auto roofs, artificial aortic, mitral, and tricuspid heart valves, plastic encapsulated transistors, Cadillac's six pound plastic instrument panel, the air-supported plastic greenhouses, the new uncrushable, washable polyproplyene "straw hats," and on and on. We compete with metals, wood, paper, and other materials, yet we haven't stunted their growth. Actually, we have created wholly new markets and invented new products, at a commercial realization rate that is getting shorter and shorter with each new development surge. A banker friend of mine once defined an invention as something which ruined his investments. While we brag about how well we invent and make plastics, I am afraid that the management of these expanding international investments in plastics can be ruined unless we manage them better in the future. The reason this is of concern is that unless we manage as well as we make, there will not be sufficient future profits in certain segments of the industry to sustain healthy growth. We don't yet have all the answers we need, and we must solve this management dilemma by facing these prospects now. ais wh: though two ^ years * men an This w rate c rate indust drop t that t the wc about into ethyl about inves eithe (more ) CMA 078779 by Robert K. Mueller -5- The Conference Board ement ft 1, nd able, ive To better understand the challenge, let's look briefly at the anatomy of industry as it is presently constituted. We retain the classical definition of plastics as man-made organic raateri- 15 which with pressure, heat, or both, may be formed into almost any shape. Even >ougb are closely related, we exclude synthetic rubber and man-made fibers - . jistinct branches of the high polymer world that have really taken off in recent /ears The United States plastics industry today employs a quarter of a million n and women, and set a production record last year of 6.8 million tons of product, -jjis was up 16 per cent over 1965, and its value was about 6.5 billion dollars. The -ate of growth of the worldwide plastics industry is greater than the United States rate. One of our panel speakers has estimated that our United States plastics industry, which had a position of about half the world production ten years ago, will irop to about 35 per cent of the world output by 1970. It is interesting to note that the Soviet Union's plastics business has been estimated at about 7 per cent of the world volume - just short of a million tons last year - but growing very rapidly. Bill Cruse of the Society of the Plastics Industry tells me there are j about 5>700 separate plastics companies in the United States. They can be divided | into several groups ; 115 ment First, the material suppliers who take basic raw materials like acetylene, ethylene, or propylene, and produce a spectrum of plastics in many forms. There are about 150 U. S. firms in this segment of the industry and they require large capital investment and extensive technical manpower. Most material suppliers today are -Ither chemical or petroleum companies. Plastics materials turned out by these basic suppliers go to other cateSoriea of firms. In some cases the basic producers even go downstream to final con^ 3uraer articles. An interesting example is the forward plunge of Union Carbide into (more ) CMA 078780 A talk by Robert K. Mueller 6- The Conference the manufacture and sale of the disposable soda pop straw in the form of a poly, ethylene tube "straw." However, generally, fabrication is a separate operation and there are ,, MOV about 3,500 such United States companies which perform converting operations so],e^ They comprise a distinct industry category and have separate dilemmas of their 0VT1 While some firms do cover the entire vertical chain of gathering raw materials and performing processing steps right down to the finished article, others dealing only with the conversion step are content to function in a more limited manner. There are many who make a good living distributing service and plastics products on a regional basis. Competition is sharpening at all levels, with changes in the anatomy of the industry indicated by the many mergers, spin-offs, integration moves, and joint ventures of the day. Significant Decisions Facing Plastics Industry Management But perhaps there is a way in which to approach this "enchanted forest" which is planted with challenging business choices. Four decisions seem to be significant in the overall context: First - the choice of the material - i.e. selection of species of plastics like polyolefins, vinyls, or other families. When dealing with classes of other materials we don't just choose "metals," we select copper or stain less steel or titanium - species which are now well defined - and so it should be in plastics species as these materials become better known. It is interesting to note here that the chief volume markets of the future lie in thermoplastics, forecast to be over three quarters of all plastic types during the next decade. Most thermoplastics will be members of three species - polyolefins, PVC, and polystyrenes. The other quarter portion will be mainly in the thermosetting species - the phenolics, ureas, and melamines. All this doesn't rule out the impact of the polysulfones, 0eco> ft* ?ne thir four lb* (more ) CMA 078781 Robert K. Mueller - T- The Conference Board polycarbonates, the polyphenylene oxides, just to mention a few of re h0v solelyt r ovn, others :d -CS Ganges rati0n the newer polymers. nd decision is the route or the technical process by which the plastics -5 S& product can be made. This is a subject In Itself. ;]ird decision area involves the total market action - how, when, where, why, and * to whom are we selling and with whom are we competing? These factors vary tremendously throughout the world, and this aspect will be discussed by our panelists. i 'oufth decision area concerns the life cycle of the material or product from infancy through maturity to decline. These cycles force integrations, spin-offs, and so on. The rise and fall of once promising plastics is part of the industry growing up. How many of us who spent time and money on polystyrene wall tile applications, or vinyl draperies, in their shining at r hours, recognized in time the relative decay of the life cycle of these businesses? duPont recently reviewed the marketing progress in Europe of its acetal resin, Delrin, after six years' effort. 60 per cent of the original applications still hold, 31 per cent had been terminated due to aint It the item no longer being manufactured, and 9 per cent of the applications are now made from other materials. What we are really talking about is the need for a better system of -i-aging the plastics business, one which is comprehensive enough to embrace all actors, eliminates emotion and folklore from decision-making, introduces consistency, ic md is basically an evolutionary process using the experimental method which we so successfully employ in the scientific side of our business. Such a philosophy and reas, -s j astern is no more complex than those employed in other business sectors, where corporate decisions are also being made in the face of multiple dilemmas. 41 (more ) CMA 078782 A talk, by Robert K. Mueller - 8- The Conference a. The steel and auto industries set good examples in their use of input put analysis techniques for long-range economic projections of their business systems. A recent elaborate effort is the one by economist Clopper Almon, Jr.} ^ has worked out growth estimates for 90 industries. Interactions of supplier indus tries like the coal mines or the steel consuming industries, or the auto or machi0 business, are perceivable in these business equations with management science tech, niques and computer tools. With such analyses, basic business decisions can be soundly made from a host of alternatives. This same management philosophy approach is available for use on the business configurations existing in plastics today. Hastily, I must say that any plastics industry manager who can be replaces by a computer, or any other tools of the management scientist, should be. However, there is no question in my mind that managers will be more successful in resolving dilemmas, if they will learn to use some of the decision-making tools available to them and their staffs. Outside expertise often is needed in designing a decision making process, to decide if these management science concepts are Justified, and then to actually go about it. You know, an old Chinese proverb says there are few situations in life that cannot honestly be settled, and with little loss of time, either by suicide, a bag of gold, or by thrusting a despised antagonist over the edge of a precipice on a dark night! With the host of problems facing plastics management today we dare not use these Chinese alternates, but, better, we need to isolate primary decision areas which present us with choices of material, route, market action, or life cycle of the business. Here are five major clusters of these decision areas: The Major Raw Material Producers We can begin with a typical one facing the large producer of monomers, those simple unpolymerized forms of certain chemical compounds. Where should he build his next plant? Perhaps when he chose two plant sites a decade ago in Brazil (more) stock quc balance c and abroi CMA 078783 'rach Placed ever, ^ing 5 to -on- e e, a on a not reas jf the zil |bert K. Mueller - 9- The Conference Board to supplement exports of certain monomers from the United States to American countries, he probably didn't think this action would create a ^lemraa* He had several choices open to him, but it was a manageable number tives. He looked at the locations of customers and raw materials, the aitern labor, the transportation cost, the tariff situation, and the tax loads to carry. I if there was much to consider then, look at what's been added. There's I ^ .[npact of the Latin American Free Trade Area. There's the factor of even longer -e plans he must now consider about other prospective plants of his own in Peru, - ntina, Ecuador, and so on. There's the increased impact of foreign producers on c. producers. There's an unresolved question of petrochemical feedstock quotas on ... om base in the U. S. There are special problems of recovering any investment ,-cad, and, if that weren't complication enough, the concepts of the mini-plant the super-plant create the need for a host of new decisions. I hardly need recite any more complications. The important point is that -.-.ere are many -- so many that the algebra of combinations begins to work against -r.e decision-maker. It turns out that the maximum number of interrelated variables = person can manipulate is only six or seven. So there are just too many alterna tives and, now, too little time for leisurely evaluation. That's why computers must purely be used to help us look at more alternatives than we ever could alone. 'Methods of analysis of this LAFTA type investment problem have already been developed md published for the benefit of all of us by our friends in Union Carbide. Another example: Our government, in deciding on what petrochemical feed-*ock quotas to allow U. S. producers, must consider what will happen to our Glance of payments under various assumptions about the construction of plants here and abroad. Each firm in the industry wants to see the effect of legislation on its ^profits. Obviously, both government and the firms in the industry would like (more ) CMA 078784 A talk by Robert K. Mueller - 10 - The Conference to get some idea of the consequences without having to make an irreversible W The answer: A computer simulation of sorts of the world's petrochemical busing " One such simulation has recently been built by a well-known consulting firm. Another example of the computer as a tester of alternatives has to do nth the construction of a plant, once the site has been chosen. If you will excuse thia Monsanto example - in 1961 when we were building our petrochemical complex at ,ce fti ate ne<l ;tiCS b> to Chocolate Bayou, it was a computer using a critical path program which advised us what to do when. Before construction was complete Hurricane Carla hit. We couldn^ blame the computer for that! As a matter of fact, we gave it credit for staying during a crisis and telling us what to do next. An entirely new sequence of in stallation steps was undertaken, with no loss in elapsed time to complete. If we seem to imbue the machine with near-human power, we don't mean to. In telling how to schedule our construction, the computer just goes on trying out all sorts of schedules until it finds good ones. It tests lots of alternatives, more and faster . r.ese that sensi ;uch expos ra ised -"I DusineSS ? * than we could without electronic help. Later in the program today we shall consider finance, tariffs, internation al trade, each from the point of view of a speaker expert in the field. I have not read their papers, but I will wager they include such phrases as "assuming that," "in the event that," and "of course, if." These, the traditional escape mechanisms used by management facing decision, can be put into the decision-making equation to deal with such eventualities as "if funds are scarce," or "if there's a shortage of present tl their marl Messrs. S', operating selected manageme: skilled manpower," or many other variables which may be encountered. The Plastics Polymer Producer Now, let's turn to a second cluster of decision areas - those of the industry, the plast managers of firms producing polymers. Most of these firms are already in monomer nlques wt production, but the pertinent question arises - "Should I integrate forward towards the consumer, and if so how should I go about it?" nowadays L A Analysis (more) L CMA 078785 ildn 't ' cci,. XI - The Conference Board First of all he must determine the attributes which a plastic must have to another material in the marketplace. Of course, the producer of the .a material - be it paper, metal, or wood - is also glancing sideways at the Just the other day I was Plastic pipe - up 3^ pet cent over ,ear to $1T0 million, is expected to hit the one third of a billion dollar marlf,vel i 1970, and this may still be less than 5 per cent of the total pipe raarSimulation techniques and model building are useful to the manager faced with dilemmas. Distribution systems or acquisition decisions can be structured so sensitivity of all factors can be exposed for the manager to make his decisions. ,hexposure forces clarification of objectives. In this example the question is 5ed -"Do you want to be in the plastics business, the pipe business, or the steel, 51ness?" You can be in the first two, or the last two, but not In all of them. From the viewpoint of the plastic polymer producer, there is the ever;sent threat of retaliation by his existing customers if he tries to move into :t:r markets. It is difficult to build new marketing systems and, thanks to iisrs. Sherman and Clayton, there are problems involved in direct acquisitions of :<rating firms. It takes time to build an enterprise. No matter which approach is elected, there will be a need for patient money, and, most of all, for sophisticated --.agement. This makes the problem difficult from the point of view of the plastics ijstry, but, at the same time, equally difficult for companies interacting with plastics industry. Here, again, there are common sense considerations and management tech^ues which can help in taming the dilemma of "go" and "no go." It is possible wadays to construct models of the most involved situation. duPont's Venture ^lysis program on Corfam is a well publicized example of a simulated consumer j (more) CMA 078786 A talk by Robert K. Mueller - 12 - The Conference u marketing situation in which, by mathematical model, the reactions and effects 0f other parties in the field can be rapidly estimated, and sales and profitability forecasts made. Customer acceptance or rejection, changes in the national economy even upheavals in international politics, may be tested on such a model. Publicly examples of such models exist in other industries in the form of simulation tech niques, risk and merger analysis, optimization of capital budgeting, and other complex management science approaches which are used to tackle business dilemmas. Well-known companies using these tools in other industries include General Electric H. J. Heinz, Johnson & Johnson, Proctor & Gamble, just to cite a few. The Fabricator-Convertor Let's take a third cluster of problems - those faced by the plastics fabricator and convertor, who may be dependent upon a single firm, or even several firms for raw materials. The fabricator-convertor may or may not have some process know-how invested in his machinery. For sure, he has an established franchise in the marketplace through his distributors and dealers. In addition to the technical problems peculiar to this operation, he faces continual business decision-making. What should he do about the integrated monomer-polymer firm which is considering going into the conversion end of the business, and may or may not be approaching his distributors with a prospective competitive line? Should he attempt to distribute his plastics products at the retail consumer level? These are realistic questions that must be faced by top management with the same fervor as facing a technical problem, and using all the experience, common sense, and analytical ability that can be mastered, for these problems will not go away. In the plastics industry's rapid growth, it has often fallen to the raw material producer - representing the capital intensive end of the business - to develop transformation technology and create plastics product markets, and even (more ) industry .nouldere CMA 078787 ice t*0; ts :>licU0(J ted aw w Bobert K. Mueller 13 - The Conference Board ^utin systems, to speed up the pull-through of the basic polymer production. Ji5;' trl r0Vision of capital, technology, credit, and market development cannot go on in this manner in the plastics business. The fabricating segment of the y*e.vet ._,v has now developed to a point where these business components need to be , jeered and developed hy this sector of the industry. Many of the operations in converting plastics are headed by managers who historically operated very successfully through unusual brands of intuition -ve -how, and who have had limited experience in a worldwide business environ-jp.t We certainly need common sense and business acumen now, but we can also use machine help, too. True, computers have been adopted in many plastics con,-ting firm3' record keeping, inventory control, and the like, but only rarely in ,ie field of business decision-making. Today, thanks to remote access computer echnology we find programs applicable to plastics businesses'. The convertor has vailable to him now the most modern business techniques, without a major in-house -vestment. Perhaps one of the outgrowths of this conference will be to provoke r.cse is this sector of our plastics industry to explore the worth of such a -anagement approach to their problems. Stock programs are now available to all, and :cave never seen any figures which indicate a cut-off point for the size of the firm employing them. The Customer Dilemma The dilemmas faced by the fabricator of plastics articles have a mirror -'.age in a fourth cluster of dilemmas - those facing the purchaser of these plastics products. This customer-supplier interface, as we all know, is a ticklish one. -hould the user of plastics parts integrate into plastics fabrication? The appliance auto industry have in a big way. Take Admiral Corporation's vacuum forming Plant, or Hotpoint, or Kelvinator, or General Electric's mammoth regrlgerator liner Elding plant at Louisville. Take Ford's new huge blowmolding machine scheduled to (more ) CMA 078788 A talk by Robert K. Mueller - 14 - The Conference b turn out up to forty-thousand plastic gas tanks for the 1968 T-Bird. Chrysler, (jjg Oldcmobile are not far behind. This is big business. It will take seven railroad cars of plastic resin per day just to keep Ford's fender lineroperation going! ^ new Italian Fiat has revolutionary uses of plastics, up 30 percent from last year to seventy-five pounds per car. The skills and management needed for such trans forming operations are close enough to the talents possessed in their own companies to allow a safe business integration. The recent move on the part of the government to force safety factors in the design of the automobile gives plastics an opportunity that could not be fore seen two years ago. The lamination of embossed vinyl to steel for some auto tops was so well accepted from an aesthetic standpoint it may move on to the hood and fenders - not as an aesthetic measure, necessarily, but to cut down in specular gloss - one of the safety factors the government is advancing. But hard goods producers are not the only ones faced withbusiness decisions at the plastics industry interface. Some examples: Take the paper companies, or the packaging industry - which is now the second largest market for plastics, after construction, and which consumed about 2.6 billion pounds. Also, the dairies are another example. Over 500 dairies are moving rapidly now to plastic milk bottles. The "Paxton Story" is a case of a cigarette company seeking a greater market share through improved packaging. The development effort came up with plastics as the material, and a process had to be created for fabricating the new package. These were all business decisions made on whether to be a customer for, or a fabricator of plastics articles. Such problems of complex economics are certainly amenable to business modeling and analysis. We must learn to use these techniques to give us realistic alternates from which we can make a business CMA 078789 m 're'PS d or o, astic ater se Robert K. Mueller - 15 The Conference Board Competing with Plastics Now, let's wind up with a fifth cluster of problems. The firm selling that presently compete with plastics faces an extraordinary set of dilemmas oWn. Should the firm get into the plastics business itself, or should it back with improved types, models, and grades of its own material? Should a /ersi.on to plastics, or a combination of plastics with other materials be ^st^gated? So-called "atomic wood" is a good example of plastic impregnated radiated wood making interesting strides in the furniture field. The AEC has been with Ul different types of wood and 6 different woodworking companies to jeveloP these wood-plastic composites. Senator Hart's "Truth in Packaging" efforts have shaken up many a nest in ,jjg plastics and paper industry by focusing consumer attention on the subject. The supermarkets' problem of bottlenecks at the meat counter was solved by the switch *.3 prepackaged meat cuts which could be prepared at off-peak periods, and the v.Dusewife accepted this. However, now, some disgruntled customers are complaining that they can't see the complete cut. The transparent plastic meat tray, which has teen struggling in development limbo, for eight years that I know of, is now taking .-.old with its one hundred per cent visibility contribution, and the plastics indus try diffuses itself one step further into a new business. The choices which the firms competing with plastics must face are con cerned not only with market-related problems, but lead them directly into the area of developing new technology, which must be appraised before venturing into this area of competition. However, the plastics business is different from others, not only in its marketing and its technology, but in the fact that the materials it deals with are man-made and man-conceived. In 1966, one chemical compound tolylene diisocyanate - was used to produce 100 million pounds of an entirely new composition of matter, urethane foam. This moved quickly through 200 U. S. (more ) CMA 078790 A talk by Robert K. Mueller - 16 - The Conference manufacturers' plants into the furniture upholstery market. Howard Gans, mere; ing director for Ward Furniture Company, of Fort Smith, Arkansas, predicts that within ten years plastics will, in fact, supplant wood in furniture, with the exception of antiques and some of the highest priced furniture. Last week, when in London, I saw an announcement of a United Kingdom company formed to produce instant furniture out of rigid polyurethanes. The syst the di tested in Scandinavia, consists of pouring chemicals into molds, with complete frame having attachments for legs or swivel bases formed after 10 minutes curing; These trends mean, of course, that both commodity and specialty plastics >idei require a great deal of technical research time and development costs, and they face high obsolescence risk factors. For the looker-on industry, to enter the plastics business is easy - everybody's welcome - but to stay in it, profitably, requires patient and astute management, technical capability, time and money. ;st The attraction of the industry is reflected in the latest U. S. Departmen*. of Commerce input-output analyses of twelve basic industries. This, incidentally is a good example of a management science approach to a complex forecasting problem. The plastics industry leads all others in these projections, with a 183 index of growth for 1970, compared to a 1963 base of 100. These input-output analyses will allow the manager to stand not so lonely and forlorn when business decisions are made. He can have some quantitative evaluations of the choices in his dilemma which can be helpful in deciding whether to bring his firm into the plastics industry. Conclusion And now in conclusion, the five clusters of management dilemmas represented ; by the decision area of the raw material producer, the polymer producer, the fabricator-convertor, the customer, and those competing with plastics, certainly do not exhaust the problems and the challenges in this "enchanted forest" of plastics. J (more) L CMA 078791 onhert K. Mueller - 17 - The Conference Board merely illustrative of the fact that managers need'every assistance they can international competition, technology, economic, political, and cultural further hold. As an example of an entirely separate decision-making area, we can look at 3m j^eninas posed by governmental framework, growing daily. These are particularly syste,_ 'ing; sties ,idin4 l3Ut nCVertlK:foSa must be recognized and dealt with in business dec Lslonln addition to coping with overseas governmental postures, we must con- -* vhat new constraints will be imposed by the Department of Justice, the Trade Commission, the Food and Drug Administration, the Commerce and Labor ey face sties res ^artments, the Bureau of Standards, and so on! One advantage that the keynote speaker has is the opportunity to raise ,,.e$tions without the obligation of supplying all the answers. And I certainly irtment y, em. of will -e ..r/t pretend to have all the answers. In this regard we are particularly fortunate , teing backstopped by a panel of experts who will explore the avenues leading to * answers, and hopefully deal with your questions. I would like to close with this thought. Our plastics industry was one of me first of the science-oriented industries. Its present management dilemma [ :enves both from this technical origin and from the industry's astonishing growth ^ ircimd the world. The first order of business is, of course, to get each individual rnpany in fighting form with tight management in all functions, and particularly -r` its home base environment. Without efficient parent operation, business arrival away from heme will be short lived. The best management philosophy and ssentei systems are essential, and these are available, if the industry will dedicate itself | a improving management with the same fervor that it has applied technical expertise Ly do a create and manufacture improved products. This is our management challenge. Thank you for your attention. - 30 - From: Joseph L. Naar, Director Division of Public Information CMA 078792 THE INTERNATIONAL ASPECTS OF PLASTICS: A MANAGEMENT DILEMMA A. J. WARNER Pres ident DeBELL & RICHARDSON, INC. HAZARDVILLE, CONNECTICUT 06036 Delivered Before the National Industrial Conference Board May 18, 1967 CMA 078793 1. The very success of plastics, as materials of commerce, has brought with it the problems being discussed with you today, and the siZe and complexity of the industry associated with the production, sales, transformation, and distribution, forces a much closer look as to where we are going, and how we are going to achieve a full realiza tion of the potentialities of the situation. In his keynote address, Bob Mueller has given you a broad review of the situation as he sees it with a background of the American chemical industry making the basic raw materials and having interests overseas. It is my purpose to attempt briefly to show some of the International ramifications and to highlight the fundamental decisions facing American industry in the context of world competition. To give a brief background for reference purposes, let us recall and amplify some of the data already known to you. Firstly, the growth of all plastics materials used in the U. S. has been, with minor exceptions, strongly upward since 1945. During the period 1944 - 1955, produc tion grew annually at an average rate of nearly 17%. For the period 1955 - 1965, the increase has been at an annual rate of about 12% and a reasonable assumption would be that for the next 10 years we should see an annual rate of increase of some 10%. Based on a 1966 figure of 6, 122,400 tons, this should give, by 1975, the really large figure of 17,450,000 tons. Figure 1 illustrates this point. ' 1 -- i. - . 1 1 1 '--.. -- CMA 078794 2, For the world as a whole by comparison, the rate of increase in the past few years (1962 - 1966) has been of the order of 15. 5% per year which means that the United States has actually been increasing its plastics production at a slower rate than the rest of the world. As a percentage of total world production, the United States has dropped from 54% in 1955 to 37.4% in 1965 and it is estimated that this will decrease further to 30% by 1975. Figure 2 illustrates this point. Should we look at the figures as they relate to the actual breakdown of the overall production numbers into the various types of plastics materials going into them, we get a very interesting situation. Figure 3 - World Plastics Production by Types The figures show clearly that all major producers of plastics materials in the world today have determined that the chief markets of the future lie in the area of the thermoplastics, a fact well established m the United States as early as the 1960's when 70% of the production was m this category. Of even greater consequence has been the emergence, at least as far as volume is concerned, of the polyolefins, poly styrene and polyvinyl chloride type materials, as the basic polymers of the industry. For the world overall, even including the Comecon countries, some 90% of all thermoplastics produced are now in what we may call these three basic commodity types. I hasten to use the as t and to tial cor bat fro Ca Fa to re th of CMA 078795 3. term "basic" so that we can include copolymers, derivatives and mode rations to cover the detailed grades and types of materials that have been, or will be, developed for specific applications. Advances in technology have put one material, namely ethylene, as the major raw material for the production of these three basic types, and with the increasing pressure for the lowest production costs, access to a cheap and assured large volume source of ethylene is now an essen tial to any plastics materials producer who expects to enter, stay in or compete successfully in the largest part of the industry on a long term basis. Production of plastics materials worldwide has therefore expanded from the classical and traditional chemical companies, Du Pont, Union Carbide and Chemical, Dow, Monsanto, Imperial Chemical Industries, Farbwerke Hoechst, BASF, Montedison, Rhone Poulenc, and so forth, to the petrochemical companies, and finally back to the producers and refiners of crude oil, and even the natural gas (LPG) companies. To the above list of companies, we therefore can add Shell, Standard Oil of New Jersey, Phillips Petroleum, British Petroleum, Gulf, and others. It can be estimated that in the middle 1970's some 35 million tons of plastics materials based on ethylene will be involved in world commerce. The complex problems raised in determining where this production is to be based are not only of direct concern to the present CMA 078796 4. producers, but also to others who are exploring the possibility of enter ing the field and even to National Governments because of the long term potential effect on their economies. One key to a successful solution is the availability of cheap feed, stocks for the plants now under construction or planned for the future. For a period, it appeared that only the United States had the detailed technology and domestic crude oil or natural gas supply necessary, but the rest of the world has rapidly advanced under the stimulus of available knowledge and the drive for an increased standard of living. In addition, certain practices engendered by a long period of world affluence and high standards of living at home are leading to difficult competitive situations for United States management. Later speakers this morning will deal more in depth with the labor problems of the United States, the financing problems, and with the vexing question of tariffs, free trade zones, dutyfree areas, oil quotas and so forth. In the period just after 1950, large refineries were established in strategic areas in Europe, using principally crude oil from the Middle East. The primary requirement was for heating oil, and the by-product naphtha was either used as a gasoline additive or as a source of chemicals and particularly ethylene and propylene. In the past few years the pro duction of naphtha has been more and more directed towards its use as a feedstock for chemicals and for manufacture of gas for fuel purposes. CMA 5. ^0 years ago it appeared that there might develop a shortage of economic priced naphtha with the soaring demand for the product but the discovery of natural gas in the North Sea has eased this concern. Thus the European producer of plastics materials based on ethylene appears in a very good position to compete on a worldwide basis. Another area of heavy crude oil production has been the Caribbean and certain areas in the north of South America, whose products have, until recently, been exported more heavily to areas outside of, than to, the United States. The establishment of refineries in Puerto Rico, with the associated chemical plants based on the naphtha produced, has now put a highly competitive manufacturing area in the sphere of the United States with immediate problems for the domestic industry. The skillful moves of Phillips Petroleum, Commonwealth Oil and Hess Chemical in this area are well known to you. Recent representations in Washington on the question of oil import quotas show the heat that has been generated by these moves. Crude oil supplies from the Black Sea area have had the effect of helping stabilize world crude oil prices, but the growing need for the material for internal consumption in the Comecon countries has kept large quantities from being offered on the open market. This might not necessarily hold in the future. This concentration of crude oil in the Mid-East and Caribbean areas has led many world oil companies to seek other sources by CMA 078798 exploration to reduce the danger of increase of price by nationalize^ unilateral renegotiation of contracts and so forth. This search has be highly successful, and at the present time adequate supplies of crude oil are available throughout the world under ever-increasing compete conditions. For the basic commodity plastics the key to the future must lie in an ability to compete on a global basis. To do this several factors have to be considered. Firstly there is this question of the size of piatlt required to economically compete. For ethylene, it is now clear that the minimum size is 350, 000 tons per year and preferably 450, 000 tons per year. To provide the raw material stock for such a plant, it must be located adjacent to a crude oil refinery of suitable size and this refinery should operate at the highest efficiency, which means it must have outlets for the economic sale of the products, other than naphtha, coming from the refinery operations. In the United States such situa tions exist for the Houston Ship Channel complexes and the Baton Rouge - I Taft Louisiana area. In Europe, naphtha demand and disposal of non-chemical by products favor the refiner or an association between a chemical firm and a refiner. Similarly, Japan has established large petrochemical complexes, and has pioneered in methods for reducing the transport costs of the CMA 078799 I 5 been ude >etUiVe t lie s Plant hat tons mst 7. crUde oil from the Mid-East. (The Idemitsu Maru recently made its maiden voyage from Kuwait to Japan with a load of 1, 500, 000 barrels 0 crude oil) Thus we recently hear of the Phillips - Showa Denko new petrochemical center. As the size of the ethylene plant has increased, so has the mini mum economic size of the polymer plant. For example, it is now con sidered that for any future production a polyethylene plant should not be smaller than 200, 000 tons per year; a polystyrene plant, 100, 000 tons per year; and a polyvinyl chloride plant, 100,000 tons per year. These large plants call for vast capital resources and the reserves'needed to sustain them when markets do not absorb the full output of new capacity, and the growing concern of American manu facturers over this situation inside the United States has caused many of them to seek associates or partners, both within the U, S. and with out. This trend is particularly noticeable abroad, and has led to some interesting combinations of companies and approaches to the problem. We have referred to, and this audience will be familiar with, the associated companies forming the refinery-chemical complexes in Puerto Rico and particularly those basing around the Commonwealth Oil facility. You might be interested in the situation in Spain, where the basic olefins plant at the Puertolano complex is Government owned, but no fewer than CMA 078800 (Figure 4) 8. three major world companies, each from a different country, Philip (US), ICZ (UK) and Montecatini (Italy), have joint agreements for supp^ of the olefins and have part ownership in the polymer plants themselvej In a separate refinery-chemicals-polymers set up in Tarragona, Esso (US), Dow (US), Shell (UK-Dutch) and Farbwerke-Hoechst (Germany) are involved, (Figure 5) In Japan, we see a trend away from the anti-trust business approach introduced by General McArthur following World War II, and a return to the more familiar and old style Japanese practice of group ings of industries with interlocking interests and arrangements, the so-called Zaibatsu. Such practices condone and even encourage cartels, permit the division of markets, establish production quotas, fix prices and carry out a whole host of practices considered restrictive of com petition in the U. S. The Japanese have long resisted any attempt to establish production facilities in their country by foreign companies, * and where permission has been granted for the setting up of a joint company, effective control has always been retained by them. Their aim has been to establish facilities either by a patent or know-how license, or by developing their own technology using technical assistance from wherever it could be obtained. They already have the necessary knowledge for the manufacture of the three main thermoplastics com modity materials, and are currently regrouping their petrochemical complexes and establishing what group will produce which polymer, CMA 078801 8. 9- 0bviously aiming for a further aggressive approach to world markets. We have few details of how the U. S. S. R. and the Comecon nations are proposing to handle their plastics materials production questions, but some details are becoming clearer. They, too, recognize the shift to the three basic commodity type materials, and have agreements for the necessary know-how and the building of plants. Originally it was the hope of the U. S. S. R. that its Council of Mutual Economic Assistance (Comecon) would become the control agency for integrating the economies and the economic planning of the Eastern European states with the Soviet Union itself and Mongolia. Recently, it has become more evident that the individual requirements for large capital spending, and the reluctance of individual states to relinquish decision making power to a central authority has caused the Soviet Union to permit planning to proceed on a less elaborate basis, Once the immediate surge of demand is satisfied, however, I believe they will return again to a more planned approach to massive primary production facilities and that we can expect them to enter world markets in competition with other nations. CMA 078802 r An interesting situation has developed in the Near East, vvh large amounts of natural gas (LPG) exist, but which have led to be "flared" for lack of sufficient economic incentive to collect and shift all of the material available. The development of the oxychlorination route for vinyl chloride monomer using ethylene as the basic raw material hydrocarbon has encouraged one large U. S. domestic producer whose ability to compete profitably in the absence of a petro chemical base here and with the increasing price competition was becoming under question, to form a joint company with the Iranians, and this vinyl chloride monomer will be used to produce polyvinyl chloride. Since Iran cannot possibly be expected to absorb the full capacity of the plant announced, the material will obviously enter the world market. Joint companies are not new, but many large U. S. corporations are beginning to wonder whether the classical approach can be main tained when they do not have a controlling interest, especially as they contemplate restrictions on the control they can exercise, renegotiation of original agreements, sometimes under local govern ment pressure, the large capital requirements to stay competitive and the difficulties of foreign exchange. An interesting sidelight on this question is seen in the recent sale by the Distillers Company in the U.K. of their plastics and chemicals interests to the British Petroleum Group, including, as it does, a number of smaller companies set up jointly with CMA lo 5 hi, >ro. ons, ations m- and U. K. rr oup, with 11. var ious partners, including some from the United States. This growing feeling that some entirely new thinking is neces sary approaching world markets has been highlighted this past year by the announcement of several large companies in the chemicals and plastics areas that they intend in the future to act like, and wish to be considered as, international companies rather than as American com panies with international operations. This approach is all the more urgent when we consider that no longer does any one country have a monopoly on raw materials, technology, money resources and skilled personnel, and the successes of today and yesterday are no guarantee of success in the future. So far we have considered the raw material situation only, but similar problems exist for the fabricator and converter. Although he now has the promise of cheaper basic plastics materials coming from these large plants, will he be able to improve his presently small operating margins of profit, or will he find increasing pressures as companies abroad attempt to bring in finished items based on lower cost raw materials and lower labor costs. The establishment of plastics processing plants in South Korea, Hong Kong, Taiwan and Thailand, using principally plastics materials manufactured in Japan is indicative of a trend which must affect our domestic manufacturers. It is well known that substantially all of the CMA 078804 plastics artificial flowers and plants sold In the U. S. are manufact^y in the Far East. Similarly, with the loss of the majority of transist0t radio set manufacture to the Japanese, the production of the plastic cases housing them has been lost also. Many consumer items, pre 53emu large users of plastics materials, could be manufactured abroad and imported into the United States at lower cost than the domestic prodyct and the pressure will intensify. This, of course, is not unique for plastics, but now extends to fabricated steel, textiles and others. Gary Hufbauer will deal with the question of Tariffs as it relates to this problem shortly. It was the fortunate position of the United States for many years to be a large exporter of plastics raw materials, while at the same time very little material was imported. This position has now changed and I expect that it will not be long now before we will see an actual rever sal whereby more plastics raw materials are imported than exported. From the chart (Figure 6) it will be seen that the decline of exports had already stated in 1965. This situation will be, of course, particu larly acute when some of the large scale production plants now under construction abroad are brought on stream and the surplus over immediate domestic needs has to be sold. We know, for example, that the Japanese have substantially increased their exports these past few years, and expect by 1970 to export over 100 thousand tons of polyethylene; and 50 thousand tons of polyvinyl chloride. Already this CMA 078805 IZ. ^|tUre^ ^st0r stic >resently 1 and ' oductw j r Gar y 'ears - time ;er;d. cur st is W 13. pressure is being felt by the low prices being offered, for example, by the Japanese for homopolymer polyvinyl chloride. Lest we think that our own large production is a shield against importation, let us remember the experience of the United Kingdom, who found itself suddenly turned from a net exporter of polyvinyl chloride to a net importer when the Norwegians made cheaper material available from a low cost operation. On all sides, American plastics industry is faced with an urgent necessity to plan carefully for the future, not only from the standpoint of the intense internal competition, but also from the growing strength and sophistication of the world producers. Certain end use items are already lost to the American manufacturer. Unfortunately, not all of the problems are technical in nature, since, in the ultimate analysis, questions of the cost of raw materials using world available sources, and the importation into the United States of either finished goods using plastics materials, or the polymers them selves, involve balance of trade and tariff considerations which are political questions also. Vrhat is certain is that the next five years will probably be the most exciting and important one for the business - statesmen of the plastics industry. CMA 078806 CMA 078807 Figure 1 Country U. S. A. West Germany Ja pan United Kingdom U. S. S.R. Italy France Benelux East Germany Others - Western World Others - Comecon TOTAL WORLD PLASTICS PRODUCTION (in metr ic tons ) 1962 1963 1964 1965 1966 3,673,500 4,063,000 1,244,900 1,422, 200 831,300 1,061, 600 4,580,500 1, 739,900 1,376,000 5,298,000 1,973,900 1,600, 500 6, 122,400 2,200,000 1,937,300 664,400 495,700 498,900 744,700 587,300 621,300 858,100 721,100 716,600 957,100 819,000 816, 300 1,036,200 940,000 930,000 454,400 507,000 610,900 677,100 780,000 182,600 165,800 209,500 181,400 299,800 198,600 368,000 209,500 405,000 245,000 597,600 722,400 868,000 1,020, 400 1,286, 000 158,700 210,500 294,800 419,500 488,000 S,967,800 10,330,900 12,264,300 14,159,300 16,369,900 A. J. Warner May, 1967 DeBell & Richardson, Inc. Copyright J Figure 2 U.S.A. PRODUCTION AS A PERCENTAGE OF TOTAL WORLD PRODUCTION PLASTICS RAY/' MATERIALS 1955 1958 1961 1962 1963 1964 1965 1966 1970 (est. ) 1975 (est. ) 54. 0 45.5 43.5 41.0 39- 4 38. 0 37. 4 37. 4 35.0 30. 0 A. J, Warner May, 1967 CMA 078808 Figure 3 MAJOR WORLD PLASTICS PRODUCTION BY TYPES (in metric tons) TYPe Cellulosic s Phenolics Ammoplastics Alkyds Polyesters Polyvinyl Chloride Polystyrene Polyolefins Other Thermosets Other Thermoplastics 1962 U. S. A. 1964 1966 71,700 262.600 194,100 248,500 96, 200 551,000 577,800 980,500 274,000 417,100 73,000 314,300 258,400 268,700 143,300 746,900 765,100 1, 345, 500 251,000 414,300 81,600 430,800 294,800 317,500 204,100 1,269,800 1,088,400 1,873,000 68,100 494,300 TOTAL 3,673,500 4,580,500 6, 122,400 % Thermoplastics % Thermosets % Three Major Thermoplastics 70. 7 29. 3 57.4 73. 0 27. 0 62. 4 78. 5 21.5 69. 1 1962 14,300 57,200 92,400 50,500 11,700 119,900 68,800 174,600 21,800 53,200 664,400 64.8 35.2 54. 7 U. K. 1964 1966 15,200 64,600 113,300 52,700 17,800 180,000 82,000 237,000 26,800 68,700 14,200 71,100 124,400 58,900 27,900 205,700 118,400 289,500 47,800 78,300 858,100 1,036,200 67. 9 32. 1 58.2 68. 1 31.9 59. 2 1962 Japan 1964 1966 8, 200 55,800 199,100 29,900 20, 400 313,400 42,600 142,400 7, 800 11,700 12,600 77, 800 276,400 47,900 33,300 473,800 100,400 328,900 3, 500 21,400 13,600 95,500 340, 500 59,000 44,800 485,400 191,000 628,300 3, 900 75,300 831,300 1, 376,000 1, 937, 300 62. 3 37. 7 59. 9 68. 1 31.9 65. 6 71.9 28. 1 67. 3 U. S. S. R 1962 37,300 93,000 102,300 46,800 23,100 83,600 24,800 31,400 28,200 25,200 495,700 40. 8 59. 2 28. 2 A. J. Warner May, 1967 o > o 00 CD O CD DeBell & Richardson, Inc. Copyright CMA 078810 7" Figure 4 S PAIN PUERTOLANO COMPLEX 12% Olefins Plant Calvo Sotelo State Owned 70.000 tons Ethylene 44.000 tons Propylene 44% 0% Alcudia SA Low Density PE 30-50,000 tons/yr Crosici SA Chemicals \1% Calatrava SA High Density PE 12% 32 32% 68% 2% 22& 12% 50% L>--------------- Paular SA 50% Polypropylene L \ 1 CMA 078811 Figure 5 S PAIN TARRAGONA COMPLEX Refinery Inversiones Esso SA < 5 0% Olefins 75,000 tons Ethylene 28, 000 tons Propylene Esso Industrias Quimicas Assoc iados SA 25% fl-" 25% 1------ 25% Cia Espanola De Petroeos SA Union Espanola De Explosivos SA Farbwerke Hoechst 50, 000 tons VCM Derivados 24, 000 tons PVC De Etileno --Private 25% Shell Dow - Unquinesa Low Density PE 22, 000 tons High Density PE 5, 500 tons 1 Figure 6 U. S. EXPORTS OF PLASTICS Virgin Resin (in metric tons) I960 149,700 1961 142,000 1962 263,800 1963 267,200 1964 344,200 1965 303,700 1966 283,400 A. J. Warner May, 1967 CMA 078812 PLASTICS AND THE TARIFF G. C. Hufbauer University of New Mexico Delivered before the National Industrial Conference Board May 18, 1967 CMA 078813 PLASTICS AND THE TARIFF G. C. Hufbauer University of New Mexico The Dilemma The typical widget manufacturer's Garden of Eden has, I _pCt, tariff walls of three different heights. The barriers protecting widget es at home are very great. By contrast, raw materials and intermediate goods J to make widgets enter duty free. Foreign tariffs on widgets are low, ideally .^existent. Widgets may be a figment of imagination, but the tariff dream just out- seems to be cherished by a great many American industries. When every -iustry tries to legislate its own version of the dream, however, contradictions ;,erge. Most inputs for manufactured goods are themselves manufactured goods; jr:hermore, every country is both a home territory and a foreign market. One t .epany's tariff dream thus becomes another company's nightmare.^- Compromises are ' -paired. In making these compromises, an industry really must choose between two :road strategies. It cannot very well advocate free trade for all products except --s owru ust either champion protection, and tacitly endure tariffs both for ,s suppliers and foreign competitors, or it must espouse free trade, and vigor-sly reject all tariffs. Most American manufacturers have chosen the protectionist course. This '.rategy may be perfectly logical for textiles and leather goods, but whether Section commends itself to the plastics industry is another question- Academic -snomists, as you know, generally oppose tariffs as contrary to consumer well- ... 2 My remarks here, I would like to emphasize, are addressed not to the ^-interest of the consumer, but rather to the self-interest of the plastics ^nufacturer. CMA 078814 F Tariff Rates. The American plastics industry grew up with protecti0n Pyroxylin compounds were dutied at rates varying from $1.00 to $0.40 per pou^ between 1864 and 1900.3 Beginning with its invention in 1909, phenol formal^, was protected by a 20# tariff Mindful of the trade threat from Germany, the chemical industry presauj Congress for more protection after the First World War. The Emergency Tariff of 1921 and the Fordney-McCumber Act of 1922 answered these demands. Cellulosic plastics were given 60# ad valorem protection. The duty on synthetic resins was raised to 6c# (lowered in 192b to 45#) plus 7$ per pound.'* In a highly significant departure, the Fordney-McCumber Act based the resin ad valorem duty, along with duties on many coal tars and dyestuffs, on the American selling price rather than on the foreign price. This departure from customary practice was supposedly required to stop the fraudulent invoice habits of importers. In reality, it transformed high nominal rates into prohibitive duties. As explained in the margin, if the American selling price (ASP) tariff is X , the true ad valorem rate on the foreign price can reach - ^6 Diagram 1 portrays this relationship. An ASP tariff of 50# potentially gives protection of 100#; higher ASP rates become rapidly more prohibitive."^ The Hawley-Smoot Tariff of 193*0* inspired by the Great Depression, substantially raised most duties over their 1922 levels. Rates on coal-tar synthetic resins, however, stayed at 4-5# of the American price, plus 7^ per pound. Cellulosic plastics were tariffed at 80# on the foreign price. Vinyl acetate and the other newly emerging thermoplastics were assigned a duty of 30# on the foreign price, plus 6/ per pound. The Hawley-Smoot Tariff was part of a world-wide nationalistic response to the economic collapse. Statesmen in many nations soon realized the foolishness of mutually prohibitive tariff barriers. Over the objections of the Manufactur Chemists' Association, and other trade groups, Congress accordingly passed the fir rr :a 2CMA 078815 CMA 078816 Reciprocal Trade Agreements Bill in 193^-^ This act enabled the President t lower American duties by as much as 50$, in exchange for similar concession^ abroad. ' American tariff policy since Roosevelt has been based on extension the Reciprocal Trade Bill. In successive rounds of tariff bargaining, American duties on plasty have been lowered from the Hawley-Smoot levels. Table 1 outlines the present rat structure in the United States and other industrial nations. The first section of Table 1 sets forth average "nominal" ad valorem rates for the three types of plastics distinguished in the Brussels nomenclature la The condensation group includes phenol formaldehyde, urea formaldehyde, alkyd, polyester, silicone, and similar resins. Virtually all condensation plastics are still tariffed by the United States (though not by other countries) on the doaeittg selling price basis. Owing to competitive pressures at home, however, this has not noticeably benefitted the industry. The polymerization group includes polyvinyl chloride, polyethylene, polypropylene, acrylics, polystyrene, and other thermo plastics. Of these, only polystyrene receives ASP treatment. The cellulosic group comprises cellulose nitrate, cellulose acetate, and related compounds, none of which are dutied on the ASP basis. Evidently, the United States has a somewhat higher "nominal" tariff structure, especially on the thermosets, than other major industrial nations. The second section of Table 1, drawn from the work of Professor Balassa, compares "nominal" and "effective" rates for synthetic materials as a group (plastics, synthetic rubbers, and man-made fibers).^" The "nominal" tariff re lates the duty to the foreign price; nominal tariffs correspond to the common concept of ad valorem tariffs. The "effective" tariff, on the other hand, relates the duty to that portion of the foreign price accounted for by value added (wages and profits) in the industry; furthermore, the "effective" tariff makes allowance' for the duty on inputs.12 -b- CMA 078817 Table 1 astiCs snt rem a*ture,l0 -'s are iomestie has not mo- none lewhat :ajor -cndensation spastic s Polymerization ;lastics cellulosic tiastios United States Common Market United Kingdom Japan Average Nominal Ad Valorem Tariff Rates --* 1 \0 CM 18% 20% 20% 23% 21% 21% 21% 10% 20% 30% 20% Sweden 10% 10% 10% Ml Synthetic .Materials^ Average Nominal (if) and Effective (e) Rates NE NE NE NE NE 19% 34% 12% 18% 13% 17% 19% 32% 7% 13% Notes: 1- Tariffs on condensation plastics are based on the American selling price. However, internal competition has kept American selling prices beneath the maximum levels they might attain without attracting foreign supplies. Thus, while the highest feasible ad valorem tariff is 35%s the actual rate is about 26%. Cf. U.S. Tariff Commission, Products Subject to Duty on the American Selling Price Basis of Valuation; Conversion of Rates of Duty on Such Products to Rates Based on Values Determined by Conventional Valuation Methods, July 1966 (TC Publication l8l). 2. Plastics, synethetic rubbers, and man-made fibers. F.K. Topping, Comparative Tariffs and Trade, volume I, 1963 (Committee for Economic DevelopmentB. Balassa, "Tariff Protection in Industrial Countries: An Evaluation", Journal of Political Economy. December 1965 ates -5- CMA 078818 Suppose, for example, that a finished widget costs $1.00 on the market, that each widget incorporates $0.50 of raw steel and $0.50 of wagea profits, that the nominal duty on widgets is 10$, and that the nominal duty steel is 2$. The effective tariff on widgets is then 18$ (10$ - .5x2$)/,5 w The effective rate on a product exceeds the nominal rate whenever inputs are tariffed at lower nominal rates than the product in question. J A low prop0r^ of value added enhances effective protection under these circumstances. 14 Effective rates on synthetic materials are generally higher than noni^ rates. Following the time-honored custom of according greater protection to mors highly processed goods, inputs for synthetic materials are dutied at lower rates than the materials themselves. Of the three groups making up synthetic material, plastics enjoy the highest effective rate, at least in the United States; 42$,15 Among industrial countries, the United States has the highest overall effective rates on synthetic materials (and almost certainly on plastics), though only marginally higher than Japan. However, quotas on petrochemical feedstocks are rapidly eroding these high effective rates. Quotas on a key input exercise ap proximately the same impact as high tariffs. The steep effective rates presently imposed by the United States on plastics are reflected in its low import ratio by comparison with other areas. America imports about 1.5$ of its plastic needs, the Common Market imports about I 2-3$ of its requirements from areas other than the EEC, Japan imports around 1.7$, and Britain, about l8-9$-^ Even without high protection, the United States vouli probably have a low import ratio, but not so low as 1*5$ Almost five years ago, Congress enacted the Trade Expansion Act of 19&4 giving the President authority to cut tariffs up to 50$ of their 1962 levels. 17 The authority granted by this Act expires June 30, 1967. In a few weeks, the results of five years'negotiations will be known*' CMt' o sl*uS CMA 078819 T 18% noniinai - mor<= a.rs ap- Negotiators at Geneva have expressed pessimism, especially over tariff chemical field. The Europeans are objecting strenuously to the ASP in &ist*' -I Q 'tut the American team has no bargaining authority on this point. :1,use' The plastics industry faces a dilemma. In these last crucial weeks of nedy Round, and in the years ahead, should the industry seek to exchange 0f its present high protection for lower rates abroad and liberalisation on f inputs? Or should it, along with other members of the Synthetic Organic .o3ical Manufacturers' Association, staunchly defend the status quo? 19 Comparative Advantage. The key to this dilemma lies, I think, in David :,c&rd's concePt comparative advantage. To illustrate this concept, I will use asicple example. Suppose there are only two countries in the world, the United --rates and the Common Market, and only two products, plastics and steel. Suppose farther that labor is the sole input, that prices are proportional to labor re tirements, and that production conditions can be described as follows: Steel, per ton United States man-years l Common Market man-years l Plastic, per ton 2 3 Under these assumptions, American prices for steel and plastic will be ruch that 2 tons of steel exchange for 1 ton of plastic (e.g., a ton of steel might .rst $100; a ton of plastic, $200). In the Common Market, 3 tons of steel will exchange for 1 ton of plastic (e.g., steel, fr. 100; plastic, fr. 300). Plastic -s cheaper, relative to steel, in the United States than in the Common Market, -aversely, steel is cheaper, relative to plastic, in the Common Market than in -h.. United States. The United States has a comparative advantage in plastic; the aCaon Market has a comparative advantage in steel.2<1 Under a free trade regime, exchange rate between francs and dollars will necessarily adjust so that Africa exports plastic and the Common Market exports steel.21 Put very plainly, U. S. plastic industry and the Common Market plastic Industry would both expand - 7- CMA 078820 under free trade, while the U. S. steel industry and the Common Market try would both contract.22 The former two industries are natural allied cause of free trade; the latter are natural advocates of protection. But does the complex real world actually favor the American pias^ *j industry with a comparative advantage? Direct productivity comparisons ar re ha* to obtain.2^ Nevertheless, there are, I submit, at least six indicators of American prowess at manufacturing plastic. In the first place, the United States exports a larger share of xts plastics output than its output of other manufactured goods. Between 1952 and 1965, plastic exports ranged between 6$ and 12$ of production. By contrast j "JC* ports of all manufactures fluctuated around 3*5$ of total sales. To be sure, w Ii a given plastic matures and its technology becomes well known American exports ^ decline as a percentage of output.^ Despite pessimistic comments from some quarters, however, I detect no reversal of the export prospects for the industry ? j as a whole.^5 products decline new products and new processes will take i their place. | *4 ew n& ti` la co Secondly, the manufacture of plastic requires a great deal of capital. Equipment and structures per man amount to about $17,600, whereas the average U. S. manufacturing plant utilizes only about $4,500 per man. The lower labor costs enjoyed by competing industrial nations thus count less heavily in the plastics trade than elsewhere, simply because depreciation charges and profits assume greater importance per unit of output. Third, the plastics industry employs more skilled labor than the average firm. This is indicated by an average wage rate of $7,130 Per an, contrasted with a wage of $5,880 for manufacturing taken as a whole. The use of human capital, like the use of physical capital, enhances the industry's position visa-vis other American manufactures.^ - 8- CMA 078821 ?xas may try ke al. ;rage 1 s- Fourth, the United States enjoys a technical lead in plastics manufacture irtually all nations save Germany. The frequency of licensing arrangements oint ventures between U. S. firms and overseas companies attests to American One quantitative device I have used to measure technical disparity benatlons is the "imitation lag." This figure relates average national first action dates for various plastics to average world first production dates. A ^ lag indicates technical leadership. As of 19^2, both the United States and ^rsany had plastic imitation lags of 2.5 years; Britain had a lag of 8.1 years; all her countries had lags of 10 years or more. Fifth, economies of scale characterize plastic manufacture, particularly ^nufacture of the petrochemical thermoplastics. Since American markets are large, United States firm can more confidently erect a big plant and reap this ad.intage than his foreign competitor. Sixth, the trade record of the United Kingdom, the one large industrial -tion which most nearly practices free trade in plastics, offers much hope for the .'sited States. In 1965, Britain exported nearly $227 million of plastic material, ard imported only $153 million. If the United Kingdom, with various disadvantages hen compared to the United States, can achieve a large export surplus under renditions approaching free trade, it seems likely that the United States can accomplish the same feat on a much grander scale. Looking at these six indicators, I conclude that the United States has a r.rong comparative advantage in making plastics. If this conclusion is correct, '.hen the typical American plastic firm has more to gain by all around free trade chan by universal protection.2^ Apart from its comparative advantage at heme, the American plastics industry has, I think, an international stake in free trade. Through licensing ^rangements, joint ventures, and sole ownership, the larger manufacturers are oming extensively 'committed to overseas production.2^ This commitment will - 9- CMA 078822 prove most rewarding if each new plant can be designed to service a large Costs of production rise rapidly when small, uneconomical plants must be inst` for each product in each country. But the ideal of large markets can be achi, only when free trade conditions exist in broad geographical areas. The inter national, ^hemical^firm thus has a general interest in promoting low tariffs .29 Some Qualifications. Evidently I believe that free trade commends ^ to the U. S. plastics industry. Yet historically this industry has favored hi^ tariffs. Am I to conclude that the industry has mis-Judged its own self-in^,. Not entirely. To begin with, the industry's tariff position was really developed in 1922. At that time, plastics were in their infancy; the industry may have been truly disadvantaged in an all-out competitive struggle with Germany. But condi tions change in 45 years. The policy response of the 'twenties may no longer be appropriate to the 'seventies and 'eighties. Secondly, the plastic industry belongs to the chemical industry, more precisely, to the organic chemical industry. In my estimation, free trade commendi itself to the chemical industry as a whole, but undoubtedly there are many organic chemicals -- particularly coal-tar intermediates and dyestuffs -- which would suffer under this policy. A firm with far-flung interests in many products cannot very well advocate protection for some, free trade for others. To maximize its effectiveness, it must stand wholly for tariffs, or wholly against them. The same is even more true of industry associations. In deciding which way to turn, most firms and associations have, it seems, paid undue attention both to their own tariff arguments advanced a generation ago and to their less competitive products. But cool economic calculation might, in fact, lead some firms to choose the protective way. Third, the chemical industry may genuinely believe that it can best ealj the American balance of payments distress by maintaining a high tariff wall and - 10 - CMA 078823 roark,et. *-e(i chi? is itsSeli rn, 0rts at a minimum. 11 The balance of payments problem is too broad for imp -<ftf*io' e~ r ,nn here, but I think American manufacturers have a common interest in exchange rate eolution, rather than restrictive measures on imports, &n ' ffl0vements, tourist, or government activity abroad. Fourth and last, there are probably those who believe that "foreign-trade ,, jji answer the tariff dream of the plastics industry. Hence they feel -f.gS incentive to lobby for lover tariffs. Under enabling legislation passed in the Secretaries of the Treasury, Commerce, and Army can designate zones in '}`f f ^jacent to Ports of Entry.^ An area with zone status can store, manufacture, ^ process foreign goods, adding American components to the imported supplies, paying customs duty. If the goods do subsequently enter the United States, ^appropriate duty is then paid on the import content.^3 Until recently, zones were mostly located in major cities, such as New New Orleans, and San Francisco for warehousing purposes. In the past few ;ars, however, zones have been established in Puerto Rico and Bay City, Michigan, r'.d Taft, Louisiana, at the behest of petrochemical firms.3^ Foreign-trade zones ,-ffer the petrochemical firm two major advantages. First, the petrochemical firm can service the export market without ..".ltially paying duty on inputs. To be sure, the firm might eventually obtain rawback of duty anyway, but the foreign-trade zone avoids cash outlays to the mtons authorities and bypasses red tape. Upon payment of appropriate duties, '? zone plant can also sell to the U. S. market. Economies of large scale 'eduction can thus be realized just as if the plant were located in American nstoms territory. The second major advantage remains in the anticipatory stage. A Residential proclamation of December 1965 gave the Oil Import Administration ?Wer to set oil quotas for foreign-trade 2ones located in the continental United -totes. The proclamation, however, did not apply to Puerto Pico; hence the Union - 11 - CMA 078824 Carbide zone plant in Penuelas can Import feedstock unrestricted by quotas. Oil Import Administration has yet to make its maiden decision on quotas for ^ land zones, but petrochemical firms are hoping that the Administration will i^ favorably upon their feedstock needs. An application from Dow Chemical for Bay City is pending; Union Carbide is apparently awaiting the outcome to submit own request for the Taft complex. Needless to say, the domestic oil interests are vigorously resisting a[, quota liberalization for the foreign-trade zones. Wrapping themselves in both ^lag and balance of payments, they contend that feedstock allotments would damage the national interest. From an academic viewpoint, the petrochemical firms c0m<i in my opinion, have the better of both these arguments. But the Oil Import Administration can hardly be expected to decide the issue on its academic merits, The domestic oil industry has strong political connections. While I applaud the foreign-trade zone concept, it is only a partial answer to the needs of the plastic industry. Zones will lose most of their attraction if the petroleum interests have their way on quotas; in any event, zones will do nothing to lower tariffs abroad or to reduce duties on chemical inputs. Despite the allure of zones, therefore, I suggest that the American plastics industry not forget its long-range interest in universal free trade. W. V. re 15 Le rr ty pr Th If in 32 CMA 078825 The look Bay its nS any th -mage =uld, its. Footnote s Vf. Haynes provides en amusing example: "...the interests of American manufacturers of synthetic aromatic raw materials and of finished cosmetics collided violently and each suggested diametrically opposite remedies. This clash enlivened the dinner of the Perfumery, Soap & Allied Industries at the Hotel Astor, New York City, on March 8, 1923* [The cosmetics industry had appealedJ to V,Tashington... for a 50 per centjre duct ion in the duties on the rc.v materials of cosmetics... [7)t the dinner] Dr. S. Isermann of Von Dyk & Company and Dr. L. Jenkel of Denney & Denney fought back bitterly in defense of the duty on raw materials, landing some sarcastic blows on the selfish inconsistency of the highly protected perfumers." American Chemical Industry, volume IV, p. 2>6, 148. Certain exceptions axe made for "infant industry" and "optimal tariff" rrcuments, but these arguments have more relevance to developing countries than to advanced industrial nations. 3. U. Haynes, American Chemical Industry, volume I, Appendix VI, 1943. The The comparable ad valorem rate was probably about 50$ * U. Haynes, on. cit. This rate was levied under the Payne-Aldrich Act. V. Haynes, American Chemical Industry, volume II, Appendix V, 1948. The rates in the Underwood Tariff of 1913 had been 40$ on cellulosics and 15$ eft synthetic resins. Let Pa represent the American price for a given article, and Pf the foreign price for the same article. If the American selling price is governed only by foreign competition, the following relationship must hold, at least ap proximately, for imports of the good: (i) Pf + APa = Pa The ad valorem rate on the foreign price, t, is given by the expression: (ii) t = (Pa - Pf)/Pf If relationship (i) is solved for Pf, and that solution value is substituted in (ii), it becomes evident that: (iii) t = x/d- * ) The ad valorem rate will be lower if domestic competition keeps the American selling price below the maximum level set by potential foreign competition, for en empirical study, see United States Tariff Commission, Products Sub.ject Duty on the American Selling Price Basis of Valuation; Conversion of Rates gjsed on Values Determined by Conventional Valuation Methods. July 1966 (TC Publication l$l)T" 13 - CMA 078826 7. F. VJ. Taussig, the noted international economist, resigned from the Taj.^ Commission over the high rates of the Fordney-McCumber Act. He specific opposed the generous protection for the dye industry, which largely resu^ from the ASP tariff system. Taussig even suggested that German and Swis. fifns were better suited to the dye trade than American companies. of the past 45 years have not proven him wrong. CF. W. Haynes, American Chemical Industry, volume IV, pp. 266-70, 1948. ~~ 8. W. Haynes, American Chemical Industry, Volume IV, Appendix I; volume V Appendix VI, 19^8. 9- V/. Haynes, American Chemical Industry, volume V, p. 59, 1948. 10. The difference between "nominal" and "effective" rates is explained bel0V/ Most countries employ the Brussels nomenclature to classify their tariff rates. 11. B. Balassa, "Tariff Protection in Industrial Countries: An Evaluation," Journal of Political Economy, December 1965* 12. Let ti represent the ad valorem nominal rate on product i; a^, the input of product j per unit of product i; tj; the nominal rate on product j; and vi, the proportion of product i accounted for by value added. The effect!ve rate on i, z-j_, can then be expressed as: (i) *1*3 Cf. B. Balassa, o. cit. , p. 577- 1 7. Conversely, when inputs have higher duties than the product, effective pro tection will be less than nominal protection. It is quite possible for effective protection to be negative. 14.- Effective protection for some processing activities can thus be quite high: with a nominal tariff of 40%, makers of Venetian blinds enjoy an effective rate of 107%. G. Basevi, "The United States Tariff Structure," Review of Economics and Statistics. May 1966, p. 155. 15* G. Basevi, 00. cit. The estimated effective rate on synthetic rubber is 10%, on cellulosic man-made fibers, 39%, and on synthetic man-made fibers, -2%. 16, These figures are based on data presented in A. J. Warner, "Problems Facing the Plastics Industry," January 5, 1966, and United Nations, Commodity Trade * Statistics (Series D), 1964 and 1965. Including imports from the EEC, the I Common Market has a ratio of about 12.8%. 17. As bait for Britain and other nations to enter the Common Market, the Act also provided that tariffs could be eliminated on products in which the EEC and the United States together accounted for 80% of free world exports. Since the EEC has not been enlarged, this provision applies to very few items. The United States and the present EEC, for example, account for only 72% of plastic exports. Cf. U. B. Kelly, editor. Studies in United Commercial Policy, 1963, chapter II. This volume also provides a very readable history of United States tariff legislation. Ml'0. Cl - 14 - CMA 078827 "j*v-. Blumenthal jj,he chief U. S. negotiator! says it's possible there will to little cr no reduction of protective tariffs in the chemical field. " 'This may or may not have implications for the overall prospects of the Kennedy Round,' adds the negotiator, 'tut one thing is certain -- the biggest losers, if chemicals remain untouched, will be the chemical industries through out the world.' " Wall Street Journal, December l, 1966. Elvmenthal's views are based on the fact that 19% of the chemical industry's direct inputs come from the chemical industry itself. The plastics industry purchases 35v cf its inputs from the chemical industry. Cf. "The Transactions Table cf the 1958 Input-Output Study," Survey of Current Business, September 1955, Table 2. In act cf Congress would be required to change the ASP clause. For the views of this Association, consult the Oil, Paint, and Drug Reporter, September 12, 1966. As this example illustrates, the term "comparative advantage" refers to two comonrisons: first, the cost of the chosen product is related to the cost cf another product (or basket of products) within the country; second, the price ratio between products within the country is related to the price ratio between the same products in another country (or the world at large). The country on,leys a comparative advantage in the chosen product if its price ratio for that product is more favorable than price ratios elsewhere; other wise, the country has a comparative disadvantage. For example, if demand conditions are such that the exchange rate settles at $1 = fr. 0.75, the following prices, all expressed in dollars, will result: U. S. steel, $100 per ton; U. S. plastic, $200; Common Market steel, $75; Common Market plastic, $225* Plastic is cheapest in the United States, while steel is cheapest in the Common Market. The export pattern described will emerge as consumers seek the least expensive source of supply. The extent of expansion and contraction would depend on the precise nature cf cost conditions in the two countries. Among other things, qualitative variations between products falling in the seme statistical classification, different marketing ability of different firms, and productivity disparities between firms in the same industry within a country, all render meaningful comparisons quite difficult. Never theless, C-.P.A. MacDougall has broadly confirmed the relevance cf comparative advantage theory to trade conditions: "British and American Exports: A Study Suggested by the Theory cf Comparative Costs, Part T; Part II," Eco nomic Journal, December 1951; September 1952* Also compare the follow-up articles by II. M. Stern and G. D. A. MacDougall in Oxford Economic Papers, October 1952. I have developed this theme at length in Synthetic Materials and the Theory pf Internationa1 Trade, 1966. - 15 - CMA 078828 Pic cure million. 2b. ]I. Y. Waehrer has documented the + -- t.TW-i,,v, i-- from theoretical considerations levs'1 s of labor shill) and U. S. exports. Inter-Industry Shill Pifferenr'c.I'abnr Earnings an_d_United States Foreign Trade, i960 (Columbia University""*1 I si. J. thesis) . '7. The attractions of free trade would be magnified if developing countries Wero permitted to sell a range of light manufactures (textiles, processed foods etc.) to the United States. Jf poor nations could solve their foreign ex-' change difficulties by enlarging exports, they would less readil1- practice "import substitution" on pla.stics and ether hard-to-make products. .^1. International firms should reflect on their own possible participation in larger U. S. imports resulting from lower trade barriers. ?'). This interest may be satisfied through the creation of regional free trade areas, rather than through multilateral tariff reduction. .J0. it seems doubtful, however, that many firms have rationally calculated an eve-'ail tariff position. "the position the Synthetic Organic Chemical Manufacturers' Associaticr., P'-l, Paint, and Drug Renorte1", September 17, 1966. 37- P.. H. Lake is the very helpful Executive Secretary of the Foreign-Trade Zones Foard, located in tve Department of Commerce. The literature on foreign-trade rones includes: Foreign Trade Zones Foard, Laws, Regulations, and Other Infor mation Relating to Foreign-Trade Zones in the United States, June 1966; Annual F^nort of Fere 1an-Trqdg Zones Board (published each year); U. A. Dymsza, Fore ion Trade Zc^cs and International Fusinass, 1964; articles by R. H. Lake :n American Irnncny, and Export Fullctin, j'uly 1963> International Commerce, ^uly 15, 1954, The Gil Daily, November 8, I9S5. 3?- Usually raw materials pay lower tariffs than finished goods. Duties levied on "row" import content are thus lover than the duties which would be col lected on the same goods in more highly fabricated form if it came from abroad. Incidentally, when the tariff structure is "inverted" (higher duties cn finished goods than on raw products), the Customs authorities have allowed the lower duty to prevail. 3*' Oil, Paint, and Drug Reporter, September 19, 1966. Union Carbide, Dow Chemical, and Union Carbide respectively. Plastics agenda income for NBS for the 16 CMA 078829