Shades of Smoot & Hawley

Tacked onto the 10% tax-surcharge legislation that sailed through the Senate last week was a quiet proviso that could become the first shot in an economically devastating trade war between the U.S. and most of its close allies.

The measure would limit imported woolen and man-made textiles to 8.6% of domestic consumption, a level well below the 10.1% of the market that such foreign products snared last year. The Senate came within a single vote (38-37) of adding a quota on dairy imports to the same tax bill. House negotiators may well resist heavy pressure to agree to the textile quota in the Sen ate-House conference on the final form of the bill. Still, the rising strength of protectionist sentiment in Congress has brought serious threats of retaliation from a dozen countries.

Strong Backing. High-tariff advocates, concerned over competition from rising imports, have laid a score of quota proposals before Congress. They could affect $12 billion, or 75% of the nation's dutiable imports: not only textiles and dairy items but also apparel, steel, shoes, glass, oil, lead, zinc, pot ash, electronic products, ball and roller bearings, meat, honey, frozen strawberries, mink fur and watches. The three major bills have impressive senatorial backing: 29 co-sponsors for oil quotas, 36 for steel and 68 for textiles--in the third case enough to override a promised presidential veto. In the House, "there is a growing tendency to protectionism," said Majority Leader Carl Albert of Oklahoma last week, including "a lot of support for quotas."

If enacted, such bills would undermine last year's Kennedy Round of tariff cuts, an achievement that came after 34 years of U.S. effort to tear down the barriers to expanding trade and prosperity in the free world. Moreover, quotas would mean U.S. repudiation of the 1947 General Agreement on Tariffs and Trade, history's first major code of fair play for international commerce. Backers of liberalized trade compare today's proposed restrictions to the 1930 Smoot-Hawley Tariff Act, which by lifting import duties to record levels prompted reprisals abroad that helped to cut U.S. exports by 66% during the Depression. "The protectionists are peddling medicine more likely to kill than cure," warns William M. Roth, President Johnson's special representative for trade negotiations. "The U.S. would be responsible for initiating a major trade war."

How to Lose a War. The prime target for the inevitable retaliation would be U.S. agriculture, by far the nation's largest exporter. Many other industries now contributing to U.S. export earnings would also be hard hit, among them chemicals, electronic equipment and industrial machinery. The consequence, Administration leaders predict, would be higher prices, lower profits and fewer jobs at home, as well as shrinking markets for U.S. goods abroad. "To incite trade war would be a fool's game," says Treasury Secretary Henry Fowler, "since the U.S. would be bound to end up as a loser."

Instead, in its search for ways to reduce the U.S. balance of payments deficit, the Administration since January has been pondering, among other things, a 2% border tax on imports. Border taxes, however, if applied broadly, would require a major overhaul of the U.S. tax system. Under GATT rules, before such levies can be made on imports, indirect taxes must first be collected on domestically manufactured products, though they can be rebated on exports. Another alternative is a 5% tariff surcharge, but the U.S. cannot lawfully impose one under GATT rules without a most unlikely special dispensation from its trading partners.

Conditional Concessions. Japan, dependent on the U.S. to absorb 30% of its exports, last month sent eight top businessmen to Washington to plead against such backward steps. The delegation returned to Tokyo in gloom. "We are not optimistic at all," said the group's leader, Chairman Kiichiro Sato of Mitsui Bank. "Japanese business must start thinking seriously of countermeasures." As the Japanese see it, the repercussions of U.S. protectionism, both economically and politically, are unestimable.

In hope of forestalling border taxes and surcharges, West Germany has pressured the Common Market to speed up its own Kennedy Round tariff cuts without corresponding acceleration by the U.S. Such action would bolster the inflation-shrunk U.S. trade surplus by hundreds of millions of dollars over the next 31 years. So far, France has blocked agreement inside the EEC, but Common Market ministers will tackle the question again this week in Brussels. Hard-pressed Britain has announced that it is willing to grant full Kennedy Round cuts by next Jan. 1 instead of holding to the original five-year timetable. Canada, Denmark, Norway, Sweden and Switzerland have notified Washington that they are amenable to similar steps. All these concessions, however, hinge on the Administration's ability to thwart new protectionist moves by Congress.

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