[Prepared statement of Mr. Clayman follows:]

STATEMENT OF MR. JACOB CLAYMAN, SECRETARY-TREASURER, INDUSTRIAL UNION DEPARTMENT, AFL-CIO

Thank you for this opportunity to appear before this committee on behalf of the Industrial Union Department of the AFL-CIO. The subject under consideration by this committee, namely the "purpose and organization of economic stockpiling" is one in which, as you know, the IUD has a great interest. When this issue is considered as part of the broader question-the question of availability of the raw materials on which the industrial activity of this country depends-it is one of the most important issues facing the nation and the Congress today.

THE IUD INTEREST

The interest of the IUD in the raw materials supply availability stems from three sources:

1. The first source is our concern with the shift in the structure of our economy from the production of goods to the provision of services. Along with this is our conviction that the U.S. must maintain a strong, stable industrial base. In the past twenty years there has been a gradual decline in the share of economic activity represented by the production of goods-from fifty four percent of total GNP in 1955 to forty seven percent of GNP last year. In the same period the share of GNP represented by the provision of services jumped from about one third of GNP (34 percent) to almost half (47 percent). We are concerned that this shift represents an erosion of the U.S. industrial base that has serious implications for U.S. economic health, continued growth and prosperity. In the short run, of course, the immediate impact of any decline in industrial production is on the jobs of our members. The long run implications however, are even more serious. Because there is a greater potential for productivity increases in the goods-producing sector than in the service sector, any decrease in the relative position of the goods-producing sector diminishes the potential for overall increases in productivity. And steady improvement in productivity is not only the front line of defense against inflation but also (since we now know that runaway inflation breeds unemployment) against continued high rates of unemployment. In our view, therefore, the maintenance of a strong industrial base is an essential element of sound national economic policy. That in turn means that there must be a steady, secure, reasonably priced supply of raw materials to sustain the industrial base.

2. The second source of our general concern is related to the well-documented, increasing dependence of the U.S. on imported supplies of many essential industrial raw materials. It is clear that the world will not run out of raw materials in the foreseeable future and for that we are relieved. Indeed, this nation is fortunate that its dependence on imported materials is relatively limited compared, for instance, to European industrialized nations or to Japan. But despite our natural abundance there still are some essential commodities in which our import dependence is significant and not easily overcome. In the case of manganese, nickel, bauxite, chrome and tin, for example, U.S. requirements must be met almost entirely by imports. Although the U.S. has some domestic zinc resources, these are gradually being used up so that our import dependence for this metal is increasing. Already we must import about 60 percent of the zinc we consume. Dependence on imports for iron ore, copper, and lead is less than twenty percent. Moreover, for each commodity in this latter group, a substanial portion of our imports come from Canada, thereby providing less cause for concern than is the case with other imported materials which must be supplied by countries farther away, both geographically and economically.

3. The third source of our concern is the potential for serious disruption or restriction of the flow of raw materials supplies either by the producing countries or the market controlling multinational corporations, or both. Immediately after OPEC had successfully imposed a five-fold increase in the price of oil, a wave of concern was felt throughout this country-as well as others that similar cartels would develop among the producers of other non-fuel industrial raw materials, and that supplies of these materials would be subject to similar disruptions and price manipulations. As it turned out, the world-wide recession of the last two years deflated somewhat the fledgling cartel movement among the producing countries of some metals (particularly copper, iron ore and bauxite). But the

potential for effective cartel action is still there. Moreover, there are other signs of market disruption potential that are equally disturbing. One is the inexorable movement of the third world countries toward what they call the "new international economic order." Without going into the nuances of all of the issues involved in the concept of the new economic order, let me just say here that we in the IUD most certainly agree that there is a strong case to be made for a more equitable distribution of the world's wealth among all peoples and all nations. World peace and security are dependent on our ability to make significant and steady progress toward elimination of the terrible disparity between rich and poor nations. We also believe, however, that any such redistribution of wealth cannot be made at the sacrifice of the standard of living achieved with so much effort by the working men and women of the industrialized nations. Successful redistribution requires continued growth, continued high levels of production, and a sure supply of essential materials.

Another disturbing indication of potential disruption of raw materials supplies is the steady and uncontrolled increase in the grasp and power of the multinational corporations. To the extent that these large corporations are able to develop and exercise oligopoly control over the materials markets, the potential for supply disruption and price manipulation must be taken into account.

MECHANISMS TO ASSURE SUPPLY FLOW

Faced with these uncertainties, there is a clear necessity to develop national policies and adopt mechanisms to assure a steady, secure flow of the raw materials on which U.S. industry depends. Three kinds of policy instruments present themselves: (1) We can adopt policies to stabilize or increase the raw material supplies from foreign sources; (2) we can adopt policies which would increase our own domestic supplies; or (3) we can adopt policies involving direct government intervention in the market in order to counter wild fluctuations in price and supply or market manipulation by either governments or multinational corporations. The establishment and utilization of economic stockpiles would fall into this last group. May I just say here that the raw materials policy resolution adopted last fall by the IUD at its annual convention recommended a blend of all three types of stabilizing policies. A copy of that resolution is appended to this statement.

The first group of policy instruments-those intended to increase or stabilize supplies from foreign sources-could include the following:

Bi-lateral commodity agreements which would aim at the establishment of a fixed U.S. supply for a number of years in return for a guaranteed price—a support floor. Although the ultimate aim should be the development of multilateral agreements, as a practical matter we should start out with bi-lateral agreements as the easiest and quickest way to an eventual international agreement.

Producer-consumer arrangements, like the International Tin Agreement, which establishes a buffer stock and sets a fixed range within which the stock manager must buy or sell. In this case, the producers of the material are required to contribute supplies to the buffer stock and the consumers are asked to contribute cash.

Long term purchasing agreements. At the present time most raw materials purchase contracts are for only a one year period. This practice, coupled with the existence of the speculative metals markets has created an unnecessarily volatile market situation for many metals and minerals. This, in turn, has led to a pattern of sharp fluctuations in price and consequent disruptions in supply flows which are not only very damaging to the producing countries-particularly the third world countries which are dependent on materials exports-but also have not inconsequential effects on the consuming nations.

Measures to increase domestic supply are equally important. Included among these are increased government support of research and development, to find more efficient ways to obtain industrial materials from lower grade ores, for example, or to develop more cost-effective methods for recycling scarce materials. Perhaps the most promising avenue for increasing domestic supplies of scarce materials is through government support of exploration and development of sea-bed resources. As I said earlier, all of these policy recommendations are included in the IUD resolutions adopted last fall.

Along with measures to assure the flow of foreign supplies and to reduce dependency by increasing domestic supplies, the U.S. must also adopt policies to protect itself from sudden sharp price increases and drastic supply restrictions. We believe that effective market intervention can be accomplished through the establishment of economic stockpiles for certain selected raw materials. We see a program to develop economic stockpiles as a necessary blend of economic inducement and economic force. It is no secret that the United States is better equipped than most nations to withstand economic warfare. We clearly have the potential to exert some economic force. We also are in a position-because of our size and wealth-to offer the materials suppliers fairly strong economic inducements.

THE CASE FOR ECONOMIC STOCKPILES

The conceptual basis for economic stockpiles in many respects is the same as that underlying the use of bi-lateral commodity agreements. In both instances, the objective is the same-to ensure a reliable supply of critical industrial materials. Under a bi-lateral commodity agreement, the United States would assume an obligation to purchase a fixed amount of the material in return for guaranteed access to the material—with the full knowledge and expectation that during slack economic periods the agreement might require accumulation of excess materials over and above actual requirements. In the case of an economic stockpile_ which in effect is a sort of unilateral commodity agreement-the U.S. would also assume the obligation to accumulate unneeded stocks at certain times, in order to gain the ability to affect the world market for that material. Indeed, in our view, the development of working economic stockpiles could become a useful stepping stone toward the development of effective commodity agreements.

The establishment of economic stockpiles in certain key commodities is the mechanism which would permit us both to take advantage of our great size and the fact that we represent a if not the major market for many of the LDC producers of raw materials, and at the same time to introduce a degree of stability into the world commodity markets. Such stability is not only beneficial to us but is esssential to protect the export earnings of the Less Developed Counries if they are to buy the goods and services they must have in order to continue their own development.

Obviously the establishment of economic stockpiles is not necessary or useful for all the materials we import. In setting criteria for stockpile commodities we suggest that a fifty percent dependency ratio might be used as a rough guide. Taking just the metals with which I am most familiar (the IUD study published last year concentrated on nine metals and minerals essential to the basic manufacturing industries) the commodities which might be considered as appropriate candidates for the establishment of economic stockpiles would include bauxite or alumina, chromium or ferrochrome, manganese, nickel and zinc. For the first three of these, domestic production accounts for less than 10 percent of total consumption; that is, for manganese 98% of U.S. requirements are imported; for chromium, 90%; for bauxite or alumina, 88%. Seventy-two percent of the nickel we use is imported and about sixty percent of our zinc requirements. The U.S. also imports almost all of its tin requirements, so that if suggested criteria were adopted tin would also be eligible for economic stockpiling. However, since tin is already subject to international market control through the International Tin Agreement (which the U.S. has joined this year for the first time), establishment of a new separate economic stockpile for tin may be redundant. It is interesting to note, however, that in actual practice the U.S. has probably had a de facto economic stockpile of tin for some time. Although the GSA tin stockpile was originally purchased to meet strategic-not economic-objectives, when the strategic objectives were lowered, and the excess tin gradually sold on the open market, the GSA stockpile took on a substantial economic function and indeed was recognized as a fourth world tin market-the other three being the London, New York and Penang markets.

Another criterion for the establishment of an economic stockpile of any particular commodity relates to the potential for substitution of one material for another. For example, at the present time there is no satisfactory substitute for manganese in its principal uses. That being so, the case for establishment of an economic stockpile of manganese is strengthened. In the case of zinc, on the other hand, plastics can be substituted for some uses, aluminum and magnesium for others. Of course, there are supply and relative price considerations for each

of the potential substitutes, but the point is that, to the degree that substitutes can be obtained at an economic price, the need for an economic stockpile is diminished.

Still a third criterion relates to what might be called the export dependency rate of the producing country. Some of the raw materials producers have single commodity economies-much in the same way that Central American countries used to be called "banana republics." Others, of course, are diversified. Indeed, it may be that in cases where the economy of the producing country is based to a very large extent on exports of a single commodity, a bi-lateral commodity agreement might achieve the same result-namely, access for the U.S. to a secure supply and achievement of market stability-more effectively and efficiently than by establishing a uni-lateral economic stockpile. Here of course, the argument becomes circular, since accumulation of stocks purchased under a commodity agreement creates a de facto economic stockpile, and the stockpile then helps to enforce the commodity agreement. In any event however, the degree of export dependency should be taken into account in any U.S. economic stockpiling decisions.

Any economic stockpile should be kept separate and distinct from the strategic stockpile which, of course, should be strictly geared to safeguard national defense requirements against supply interruptions. The economic stockpiles would not have to be unduly large in order to have the desired stabilizing effect on prices and the flow of supplies, just big enough to impact on the market.

As I understand it the quantitative objectives for the U.S. strategic stockpiles are set on the basis of assumptions relating to the length of time that the U.S. might have to be dependent on its own resources in the event of war, and that this objective is currently set at a one year's supply. Quantitative objectives for economic stockpiles, on the other hand, should be set on the basis of assumptions relating to market control or influence. It would be necessary to determine for each commodity the amount necessary to stockpile in order to have a significant impact on the world market, and thereby to protect the U.S. against potential cartel action or embargoes, or managed price and supply manipulations. As a rough guide, we estimate that, at a minimum, each economic stockpile would have to equal at least five percent of domestic consumption, ranging up to a probable maximum of twenty to twenty-five percent of domestic consumption of each commodity.

The actual size of the stockpile would, of course, vary depending on the commodity, the degree of U.S. import dependency, the potential for the development of substitutes, and the economic and political situation of the country or countries supplying the U.S. market. Where the U.S. dependency ratio is low and the supplier has no other readily available markets for his product, the economic stockpile could be relatively small. Where U.S. dependency is high and the potential for restriction of supplies through embargoes or other cartel activity is high, we would need to maintain a larger stockpile, sufficient to have an economic impact on the world market. The required oil reserve which serves as a useful precedent for the establishment of economic stockpiles is set at ninety days supply, or twenty-five percent of the annual domestic requirement. Probably no materials stockpile would have to be any larger than that.

Economic stockpiles could be used in several ways. Materials could be released for sale on the world market to counter unreasonable price increases-or in an embargo situation, they could be allocated to U.S. consumers to keep industry going.

Some of those who support the idea of economic stockpiles have suggested that such stockpiles be in the form of privately held inventories, collected with government support but held and managed privately. We do not agree with this suggestion. In our view the stockpile should be publicly owned, publicly held and publicly managed. There is ample precedent for government involvement in materials management. A quarter century experience with the strategic stockpile should be evidence enough of government's ability to operate in this area. Indeed the whole point in establishing such stockpiles is to correct the existing situation and inject the public interest into the market place. Foreign governments deal daily with our large corporations, making deals, and entering into binding agreements which vitally affect the flow of supplies on which U.S. industry depends. Sometimes these arrangements are advantageous to the U.S., but not always, and there is no guarantee that the U.S. public interest has been or will be taken into account. In any case, the recent revelations as to the way the multinational

corporations do business with foreign governments does nothing to set our minds at ease on this point. So the stockpile must clearly be handled by public, not private, means.

As with commodity agreements and other methods to introduce stability into the materials markets, the ultimate policy goal should be the development of an internationally managed stockpile for crucial industrial materials. In fact a group of Less Developed Countries (LDC's) has already called for multi-lateral commodity agreements and the establishment of international commodity stocks for what they call ten core commodities. Although these ten core commodities are primarily agricultural (cocoa, coffee, etc.), they also include two essential industrial metals, copper and tin. It is interesting that neither of these two commodities are in the group the IUD would propose as appropriate for domestic stockpiling. This is because, as noted before, tin is already subject to international control, and in the case of copper, since the U.S. is one of the world's major producers, policy measures to increase domestic resources would appear to offer a better route to a secure, stable supply than the establishment of an economic stockpile.

I would like to point out that of the several alternative methods suggested here to protect and secure raw materials supplies for U.S. industry, the single one that could be adopted most quickly and implemented most efficiently is the establishment of domestic economic stockpiles. Such policy options as commodity agreements, sea-bed development, increased research and development and even the introduction of long-term purchasing agreements require more time and/or money. On the time element, it is unfortunate but true that multi-lateral international agreements-put together slowly and with laborious effort-take more time than bi-lateral arrangements, and that uni-lateral actions require even less time than the bi-lateral ones. The establishment of economic stockpiles is, of course, a uni-lateral action. All that is required to get going on effective use of the economic stockpile alternative is willingness and determination on our own part.

To wait for international agreement on a package of commodity arrangements, complete with all of the details involved in developing, maintaining and managing multinational stockpiles, is to eliminate for all practical purposes the option of using this particular mechanism for achieving market stability.

On the question of money, it is clear that such options as additional research and development efforts, or sea-bed development, or even the development of long-term purchasing agreements would require not only a substantial initial outlay of public funds, but also a long-term commitment to keep up with such expenditures for years to come. Economic stockpiles, such as we are suggesting here, limited to a few commodities and held to a reasonable size, would not be too costly in our judgment. For example, the cost of purchasing a five percent domestic consumption requirement for the five metals we have suggested as appropriate for economic stockpiling; that is, chromium, manganese, alumina, zinc and nickel, at current prices would amount to something in the neighborhood of $60 to $90 million. Since it would very likely be necessary to accumulate stockpiles larger than the equivalent of a five percent domestic requirement for some of these materials in order to impact on the world market, the total cost would undoubtedly be somewhat higher-perhaps in the range of $300 to $400 million. But even $400 million is only one-tenth of one percent of this year's proposed federal budget, not too great a price to pay for assuring a stable supply of materials for our industry, to maintain our industrial base and, of course, a high level of good industrial jobs for our people.

CONCLUSION

The interest of the IUD in securing a stable supply of raw materials for U.S. industry is synonymous with our interest in maintaining a strong industrial base for our economy. We are concerned that the supply of raw materials on which we depend is vulnerable to disruptions either from political or economic actions on the part of the producers of some of those materials, or from market and price manipulations by large corporations which, in some cases, effectively control the market for those commodities. We also understand the need of the Less Developed Countries to increase their export earnings. Moreover, we are sympathetic with their desire to move ahead with development activities so as to improve the general standard of living of their people. In our view, progress of the third world countries is inextricably linked to continued economic strength and