and on finished rope. In as much as about 1 pound of abaca is required to produce 1 pound of rope, the current freight differential, corresponding to approximately 1 cent per pound, favors the movement of abaca rather than of rope."5

According to existing law, the entry of Philippine cordage into the United States during the Commonwealth period will be restricted by the absolute quota of the Cordage Act until May 1, 1941, and thereafter by the duty-free quota of the Independence Act. During the second 5 years of the Commonwealth, the Philippine export taxes will, moreover, reduce the advantage now enjoyed by Philippine cordage manufacturers in the United States. It does not appear, however, that the export taxes will of themselves cause any material reduction in the quantity of Philippine cordage exported to the United States. Immediately after the Philippines becomes independent, the application of the United States duties will operate to reduce the quantity of Philippine exports of cordage, as well as the profits derived therefrom, but it seems unlikely that the duties will be prohibitive of all imports. The charges for transportation to the United States for this product constitute a third factor which may become as important in its effect upon Philippine shipments to the United States as either the Philippine export taxes or the United States duty.

CHARACTER OF RECOMMENDATIONS

The Committee recommends that, upon the expiration of the Cordage Act on May 1, 1941, an annual quota of 6,000,000 pounds, exclusive of binder twine, be imposed on imports of Philippine cordage into the United States. The Committee also recommends that shipments of Philippine cordage within that quota limitation be subject to Philippine export taxes, and that shipments in excess of that quota be permitted to enter the United States on payment of the full United States duty. Such an arrangement would extend to the Philippines, after the expiration of the present law, the same privilege accorded to foreign countries, i. e., the privilege of making unrestricted shipments of cordage to the United States upon the payment of the United States duty; moreover, it would bring the quota provisions for cordage into conformity with those which Congress has already established for sugar and for coconut oil. The Committee believes that binder twine should be excluded from the cordage

Trans-Pacific Conference contract rates:

(1) Rope, effective Apr. 1, 1938, Philippines to Atlantic and Gulf ports$48 per 20 cwt.

(2) Abaca, effective Feb. 1, 1938, Philippines to Atlantic and Gulf ports$4 per bale (278.3 pounds).

quota, in as much as binder twine is permitted to enter the United States unrestricted and free of duty from all other sources.

The Committee further recommends that, after the Philippines becomes independent on July 4, 1946, the quota of 6,000,000 pounds be retained and that the cordage entering under that quota be subject to the graduated import duties previously referred to. Shipments in excess of the quota should be subject to the full United States duties then existing. This arrangement would afford the Philippine cordage industry an adequate period in which to make required adjustments with respect to that portion of its production which is marketed in the United States.

TOBACCO AND TOBACCO PRODUCTS

Tobacco Culture and Trade

Approximately 137,000 acres, or 1.4 percent of the cultivated land in the Philippines, are devoted to the culture of tobacco, which is largely concentrated in three regions. The first and most important district is the Cagayan Valley in northeastern Luzon, the second is situated along the northwestern coast of Luzon, and the third is in the islands of Cebu, Negros, and Panay. Tobacco is the principal crop in the Cagayan Valley; it is one of the major crops along the northwestern coast of Luzon, but is less important in the three Visayan Islands. Isabela Province, located in the Cagayan Valley, is the largest producer of leaf tobacco in the Philippines.

Tobacco is grown on a great number of small farms and on a few large plantations. The capital invested in tobacco lands and improvements approximates $21,000,000.66 Filipino landowners cultivate most of the tobacco land, although Spanish capital controls a few of the large plantations. Persons engaged in tobacco culture have been estimated to number 100,000. The laborers are employed either in the fields, or in the warehouses where the crop is graded and baled. Large manufacturers of tobacco products have representatives and maintain warehouses in the principal producing regions. The tobacco is purchased from the grower, is sorted and baled, and then is either exported abroad or shipped to the Philippine factory of the buyer, where it is prepared for use in the manufacture of various tobacco products.

The principal export markets for Philippine tobacco are Spain and the United States. Exports to Spain have regularly been in the form of leaf tobacco, while exports to the United States have been in the forms of cigars and, to a lesser extent, scrap and filler tobacco.

"Philippine Statistical Review, vol. 2, no. 4 (1935), p. 310.

Exports of Philippine leaf tobacco to Spain declined sharply in 1937 and, as a result, exports of Philippine filler tobacco to the United States increased.

Cigars

THE CIGAR INDUSTRY IN PHILIPPINE ECONOMY

Approximately 90 companies, 25 of which were located in or near Manila, were engaged in the manufacture of cigars during 1937; four of the latter accounted for the major part of production in the Philippines. Including warehouses, factories, and equipment, the total investment in the industry is estimated at about $9,000,000. Spanish companies have the largest investment, about 60 percent of the total; American, Swiss, Chinese, and Filipino investors control the remaining 40 percent.

Over 15,000 factory laborers are employed in the manufacture of cigars. Much of the labor is paid on a piece-rate basis on terms which vary in accordance with the quality of the cigar produced. Machinery is used in the manufacture of cigarettes and also in the wrapping of cigars with cellophane and in the banding of them; it is not used in the actual manufacture of cigars.

Of the total quantity of cigars produced in the Philippines, about 35 percent is consumed there and 65 percent is exported-60 percent to the United States and 5 percent to other countries. Exports of cigars have usually constituted over 50 percent of the total value of exports of tobacco and tobacco products; the percentage was 66 in 1937. In that year, total exports of cigars amounted to 204,602,000 valued at $3,072,000, of which shipments to the United States totaled 181,380,000 cigars valued at $2,688,000. (See table 17.)

RESTRICTIONS IMPOSED BY THE INDEPENDENCE ACT

For the first 5 years of the Commonwealth, according to the provisions of the Independence Act, Philippine cigars will have unlimited free entry into the United States. During the second 5 years, progressive export taxes will be assessed against Philippine cigars shipped to the United States. Like the export taxes on other dutiable commodities, those on cigars will begin at 5 percent of the United States duty and rise to 25 percent in the tenth year of the Commonwealth. Commencing July 4, 1946, the Philippine product will be subject to the full United States duty. The present duty on cigars is $4.50 per pound plus 25 percent ad valorem."

"On most tobacco imports into the United States, the effective rates are 20 percent less than the rates appearing in the Tariff Act, in as much as the United States imports of tobacco products come chiefly from Cuba.

Percent

In 1937, 189,900,000 Philippine cigars were sold in the United States; of this number over 99 percent were class-A cigars, most of which were retailed at 2 for 5 cents.68 Because of the low price, the export taxes provided for in the Independence Act will become a particularly heavy burden. Manufacturers of cigars in the Philippines cannot raise the retail price of their product without losing a substantial fraction of their United States market. The more expensive Philippine cigars have been unable to compete with cigars produced in the United States retailing at more than 5 cents each, and the cheaper cigars have encountered severe competition from United States machine-made cigars, especially in recent years.

69

The average price paid for Philippine cigars in the United States market in 1936 was $15.14 per 1,000 cigars. This price included the United States internal revenue tax of $2.70 The Philippine manufacturer, therefore, received $13.14 per 1,000 cigars, from which he had to deduct the cost of raw material, labor, overhead, packing, and shipping before arriving at a net profit. On the basis of the present United States duty and present wholesale prices, the export tax in the sixth year of the Commonwealth period will amount to $4.20 per 1,000 cigars, leaving $8.94 to cover the cost of manufacture; in the eighth year of the Commonwealth, the export tax will be $12.59, leaving the manufacturer only 55 cents for 1,000 cigars; in subsequent years the tax would be greater than the selling price. It is obvious that shipments of Philippine cigars to the United States would, in the above circumstances, be abruptly curtailed by the imposition of the export taxes." 71

CHARACTER OF RECOMMENDATIONS

The Committee recommends that an annually declining duty-free quota, which should also be free of export taxes, be established on

Class-A cigars are those which are tax-paid to retail at not more than 5 cents each. The United States internal revenue tax on class-A cigars is $2 per 1,000 cigars. Approximately 90 percent of the Philippine cigars shipped to the United States are priced to retail at 2 for 5 cents, 6 percent at 5 cents each, 3 percent at 3 for 5 cents, and 1 percent at more than 5 cents each.

Annual Report, Collector of Internal Revenue, Philippine Commonwealth, 1936, p. 72. The average prices of Philippine cigars probably have not changed appreciably since that time.

"The internal revenue taxes collected on Philippine cigars sold in the United States are remitted to the Philippine Treasury by the United States Government. The amounts remitted during recent years have approximated $500,000 annually. 11 Any decline in the sale of Philippine cigars would affect adversely the sale of several United States products used in the manufacture of such cigars; these products include wrapper tobacco, banding and wrapping machinery, lithograph material for bands and boxes, and foil and cellophane for wrapping. Over 80 percent of the Philippine cigars shipped to the United States are wrapped with American leaf tobacco.