SUMMARY OF CONCLUSIONS
On the basis of the facts presented the commission agrees that the data indicate an increase in tariff rates, if the differences in costs of production are to be equalized between lower-priced grades of foreign hats and comparable products of American factories. In respect of such hats, Italy is the principal competing country.
The commission further agrees that foreign hats sold in the United States on a basis of quality rather than price are the higher-priced hats which at this time are not keenly competitive with the products of the American industry. With respect to such higher-priced hats, Commissioners Costigan and Dennis are of opinion that Great Britain is shown to be the principal competing county, and that under the law the data indicate that the duty should be reduced.
The commission agrees that $9.50 per dozen, foreign valuation, represents a fair breaking point for customs purposes between lower-grade hats competing on a price basis and hats of superior material and workmanship competing on a quality basis.
Under section 315 of the tariff act of 1922 there is an undetermined legal question with respect to including transportation expense in estimating foreign production costs. Commissioners Costigan, Dennis, and Baldwin agree that under subdivision (c) of section 315 a fair estimate of foreign costs should include the expense of transporting the foreign product to the principal competitive market or markets in this country. For hats whose foreign value is not in excess of $9.50 per dozen the rate of 88 per cent ad valorem is indicated as the correct duty for equalizing costs, with transportation included.
Chairman Marvin and Commissioner Glassie agree that under the law costs of production do not include transportation costs on either side. If transportation costs be not included in the foreign costs of production shown by this investigation, the rate indicated by the cost data would be 105 per cent on foreign valuation. This rate being in excess of the maximum permissible under subdivision (a) of section 315, resort must be had under subdivision (b) of section 315 to the American selling price basis of valuation in order to equalize the differences in production costs. For hats whose foreign valuation is not in excess of $9.50 per dozen the rate of duty thus indicated by the cost difference is 50 per cent on the American selling price.
As to hats with a foreign valuation above $9.50 per dozen, if foreign transportation be included, the present duty of 60 per cent on the basis of foreign valuation is in excess of the difference in cost of production and the rate of duty indicated is 55 per cent on the basis of foreign valuation. If foreign transportation be not included, the rate of duty indicated is 69 per cent on the basis of foreign valuation. The figures are shown in detail in Table 9, on page 10.
In the accompanying report the above conclusions will be found more formally stated for the purposes of a proclamation.
Respectfully submitted.
Thomas O. Marvin, Chairman.
Edward P. Costigan,
Henry H. Glassie,
Alfred P. Dennis,
A. H. Baldwin, Commissioners.
SEPARATE STATEMENT OF COMMISSIONER COSTIGAN, IN PART CONCURRING AND IN PART DISSENTING, IN THE INVESTIGATION OF MEN'S SEWED STRAW HATS
While I concur with my associates in transmitting the commission's data in the investigation of men's sewed straw hats, a differentiation of views must be expressed with respect to certain conclusions which may be drawn from such data.
Both higher and lower duties indicated by the commission's cost figures.—Under the provisions of section 315 of the tariff act of 1922, the information secured by the commission and summarized in this report points not only to an increased duty on lower-priced hats but also to a decreased duty on higher-priced hats. It is submitted that no satisfactory reason can be assigned under the present record for failing to recommend such a simultaneous upward and downward change in the present rate of duty by the use of the provisions for flexibility in the tariff act of 1922. Under the controlling statute all commissioners are agreed that a clear distinction exists between the bulk of the lower-priced hats coming from Italy and the lesser but considerable quantity of higher-priced hats imported from Great Britain. This feature of the commission's summarized data is particularly presented in Tables 5, 6, and 7, in which are shown the sources, volume, and foreign values of imported hats. Table 8 presents American and Italian costs of lower-priced hats; Table 9, cost data for higher-priced hats in the United States and Great Britain. Table 8 indicates that, in lieu of the present duty of 60 per cent on foreign value, a duty of 88 per cent on foreign value is required to equalize the costs incurred with respect to the lower-priced hats; and Table 9, that a duty of 55 per cent on foreign value will suffice to equalize such costs in the case of the higher-priced hats. In other words, the record establishes the need, if competitive costs are to be equalized under section 315, for creating two classes of men's sewed straw hats, with a different principal competing country and a separate rate of duty for each class. Under the circumstances, to confine the findings of the commission to an increased duty on lower-priced hats is, in one important particular, to fall short of the statutory responsibility undertaken when the commission ordered an investigation of the adequacy of the present 60 per cent ad valorem duty as a measure of equalized costs in the United States and foreign countries. A partial conclusion from the commission's data, where, as here, a comprehensive conclusion is clearly warranted, would appear to be discriminatory and fail to fulfill the scientific and impartial purposes of the provisions of section 315.
Determining the dividing line for tariff purposes between higher and lower priced hats.—The above tables sufficiently demonstrate that the great bulk of men's sewed straw hats, imported at the port of New York during the period of investigation, came from Italy and had a foreign value of $7 or less per dozen, and much the larger part of the higher-priced hats came from England and had a foreign value of $8.50 or more per dozen. The separation into classes of lower and higher priced hats, with different duties for each class tends to result in an overstatement of the values of the lower-priced imports in order to obtain the benefit of the lower duty on high-priced imports. There is also a tendency of the higher-priced imports to increase in volume. To meet the changed situation a higher "breaking point" than the $7 value is desirable. For example, with a 90 per cent duty, a hat whose foreign value is $7 per dozen would cost, landed, duty and transportation paid, $14.40. If the rate of 60 per cent remain on hats in the higher bracket, as certain commissioners suggest that it continue to do, instead of the $7 hat it might be profitable to import a hat worth $8.25 per dozen, which would enter, duty paid and transportation included, for $14.30. Adopting and applying the same method to hats having an invoice value of $7.50 or less per dozen, a breaking point of approximately $9.10 would make it unprofitable to bring in higher-priced hats in order to obtain the benefit of a 55 per cent rate of duty. A breaking point of approximately $9.50 would therefore appear to be safely calculated to prevent overvaluation with respect to the great bulk of low-priced men's sewed straw hats now being imported.
Some omissions from and doubtful features in the commission's report.—Although from the point of view of equalizing foreign and domestic costs under the provisions of section 315, the data of the commission on their face point to an increase from 60 to 88 per cent ad valorem, complete frankness compels the statement that the conclusion arrived at is not free from difficulties; that the record is not unequivocal; and that a strong case might be made for not advancing the duty to the full extent thus indicated. Since the application of the cost-of-production standard under section 315 is still in its experimental stages, it may promote accuracy and help to bring about scientific amendments of the present law to illustrate in this investigation the possible danger of using the commission's figures to fortify different and inconsistent conclusions. The data obtained by the commission in the straw-hat investigation are unsatisfactory in the following particulars:
Representativeness of samples.—In selecting hats assumed to be representative of American production, it was found impracticable to determine the respective percentages of production of cheap, medium-priced, and high-priced hats. In consequence there is some reason to believe that the limited figures secured with respect to cheap American hats has tended to exaggerate American costs beyond what an exactly representative selection would have shown. Figures were secured for only a few producers of cheap American hats, and while it is impossible to say what weight should be given to such cheap American production, expert opinion is not wanting in support of the view that because of the method of sampling employed, American costs as a whole have been unduly elevated for comparison with Italian costs. While it is too late to make any exact mathematical adjustment on this account, it is only fair to urge distinct caution in accepting at their face value and following to their inexorable conclusions the comparisons based on the domestic and foreign data.
Probably the most important principle of sampling employed by the commission's agents when confronted with the problem of selecting for cost comparison a few types of hats from the many manufactured was the choice of those types of hats with respect to which the domestic industry has been suffering the keenest competition. It must be clear that the selection of such hats tended to show the widest cost divergence for the two countries, since it was to be expected that the severest competition would have been experienced when the relatively higher-cost hats of the United States met the relatively lower-cost hats of Italy. Nor could it be said that such hats as were chosen were the only "similar competitive articles," since the foreign manufacturers can and do produce all types and styles sold in the United States. The fact that the American industry earned approximately 10 per cent on its invested capital (even after the payment of large salaries) must be chiefly explained by the profits earned on hats with respect to which there was no such acute competition. Obviously such more profitable hats strengthened the domestic industry's competitive resistance.
Importers' selling expenses omitted.—Through inadvertence, but none the less unfortunately, the selling expenses of importers were not obtained by the commission. There was considerable testimony at the commission's public hearing to the effect that a relatively heavy burden rests on such importers in selling such straw hats in the United States. (See Transcript of Public Hearing, pp. 110-116.) The American manufacturers' costs of marketing their hats to the jobbers were secured by the commission's representatives, but the selling expenses of importers of foreign hats (without which Italian hats could not reach American jobbers) were not secured: thus, the complete picture of the competitive cost situation is not presented in the commission's report.
The significance of this omission is considerable. Under the provisions of subdivision (c) of section 315 the statutory mandate to consider much "advantages and disadvantages in competition" is unavoidable, and, while it is probably not reasonable to reject the commission's findings as a whole because of this record defect, some allowance would be reasonable falling short of the extreme conclusions to which the data would otherwise point.
In answer to the argument that the domestic industry has so well withstood the competition offered by what seem to be extremely low-cost Italian hats, it has been urged that the Italian producers are far from their market and that jobbers prefer a source of supply more conveniently at hand. This statement involves the admission of a competitive disadvantage suffered by the foreign producer, which is clearly not capable of being measured. However, the one statistically measurable marketing disadvantage of the foreign producer, referred to, was unfortunately neglected when the commission's data were assembled. As has been suggested, costs secured, though not used, for the American producer included his expense of placing his hats in condition ready for delivery to the jobber, but only those Italian costs were obtained which with transportation added bring the product to the docks at New York. Importers must incur the expense of handling and reselling before the product is ready for the jobbers. In so far as such importers perform the jobbers' functions, the objections stated may not be valid, but any importers' costs of reselling to jobbers should undoubtedly have been collected and considered.
It may further be noted that some American manufacturers actually sell their hats to retailers. Such domestic selling expenses were secured by the commission on its schedules, and there is reason to believe that certain overhead items in the assembled costs are probably larger than they would otherwise be because of the imperfect allocation of selling and manufacturing expenses.
Deficiencies in comparative overhead data.—More striking in some respects than the failure to secure importers' selling expenses is the contrast exhibited in the commission's report between overhead expenses in the United States and abroad. The foreign overhead expenses are mere estimates, since the commission's representatives were refused access to the original books and records by practically every foreign firm. It accordingly became necessary to resort to estimates based on flat percentages of prime costs or sales price. These were in fact submitted by Italian manufacturers and used by the commission's representatives. It now develops that these percentages have never been analyzed or justified. Indeed, there is no definite record of what expense items were included or neglected in such percentages. The overhead expenses in the United States include very considerable salaries paid to officers of the domestic manufacturing concerns, and the question is presented whether, as some accountants maintain, such salaries should not be charged exclusively to selling rather than manufacturing expenses, since such officers usually pay more attention to the selling end of the business. In the commission's records it appears that about 85 per cent of the total officers' salaries was charged to manufacturing and about 15 per cent to selling. The importance in cost investigations of scrutinizing high salaries should be evident, as they might easily be, although, in this instance it is not suggested that they have been, used to conceal profits. It is worthy of note that the average salaries allowed by the commission's representatives in the domestic costs of all the hats manufactured amounted to 69 cents per dozen—nearly as much as the entire average Italian overhead charge. It is to be remembered, as already stated, that this average amount does not include the additional item allowed in the selling expense for officers' salaries. It is of interest to note, further, that the American firms which complain most of Italian competition showed the largest salary accounts. One firm, in fact, had a salary expense, included in manufacturing cost, of more than $1 per dozen hats. Nevertheless, even after the payment of such salaries, it has been shown that the industry as a whole earned approximately 10 per cent on the invested capital during the period covered by the commission's investigation.
It would be obviously difficult to determine what salaries should reasonably be allowed, but, in view of such a showing, it might be argued with force that, as has been done in other investigations when data unsatisfactory for a fair comparison have been secured, such data on both sides should be excluded from the final calculation. To illustrate, the commission in the present investigation has eliminated the item of interest here and in Italy, since adequate data for the Italian industry were unobtainable. If this principle were followed in the matter of overhead, a conclusion might reasonably be based on the comparison of material and labor costs here and in Italy plus transportation from Italy to our principal market or markets.
To illustrate the possibility, already mentioned, of diverse conclusions from the commission's record, the difference between the material and labor costs here and in Italy, with transportation included, is shown in the following table:
| Domestic | Italian | |
| Material costs | $6.44 | $4.35 |
| Labor | 4.60 | .87 |
| Total | 11.04 | 5.22 |
| Difference | $5.82 | |
| Transportation to New York | 1.10 | |
| Final difference | 4.72 | |
| Foreign selling value | 6.42 | |
| Per cent | ||
| Ad valorem duty required to equalize on basis of foreign selling value | 74 | |
| Present duty | 60 | |
The failure to consider interest on investment in the overhead introduces another difficulty of some importance. If rents actually paid are included in costs, equality of treatment demands that interest on capital invested in plants owned, and therefore not rented, should be considered. In the costs of 14 of the American companies investigated the rent charge amounted to $0.29 per dozen for all styles of hats. It appears that there is no information to show that any one of the Italian companies covered rented its factory; therefore, the failure to include interest on the capital invested in the Italian factories may have overestimated the relative strength of Italian competition. The failure to include interest on invested capital in the Italian costs might justify the exclusion of the rent item from the American overhead costs.
It will, of course, be argued that to disregard all overhead costs in both the foreign and domestic figures in the way suggested would fail to measure the domestic disadvantage arising from relatively higher overhead expenses. There are, however, two considerations, discussed in detail in this statement, which tend to compensate for any inaccuracy which the above findings might imply. They are (1) the method of sampling employed by the commission; and (2) the failure to consider certain of the Italian industries' marketing expenses.
Conclusions.—The principal significance of the foregoing discussion is to be found in the conclusion that, in recommending under the law an increase in the present rate of duty on lower-priced hats from 60 to 88 per cent on foreign value, the statute is being liberally construed from the point of view of the domestic industry, in the effort to arrive at an equalization of costs in the United States and abroad. Regardless of the legal question as to whether transportation should or should not be included, any higher duty on any of the hats investigated than 88 per cent on foreign value—particularly so high a duty as 105 per cent, or the equivalent 50 per cent on American selling price, which has been suggested by certain commissioners—involves such a grave departure from the economic purposes sought to be promoted by section 315 as to make it highly desirable that the present investigation be reopened before any such increase in duty is proclaimed.
Reviewing, therefore, the whole record in this investigation and dismissing, though not without hesitation, the foregoing argument in favor of a lower rate of duty than 88 per cent, foreign value, on the lower-priced hats, it is submitted that under the law the data collected by the commission in this investigation warrant formal findings of fact to the following effect:
1. The classification for men's sewed straw hats in paragraph 1406 of the tariff act of 1922 should be changed to provide separate rates of duty for imported hats of different foreign values.
2. The present rate of duty should be increased to 88 per cent on imported hats having a foreign value of less than $9.50 per dozen.
3. The present rate of duty should be decreased to 55 per cent on imported hats having a foreign value of $9.50 or more per dozen.
Edward P. Costigan,
Commissioner.
July 15, 1925.