Detour into Protectionism

During the European Economic Community's eleven years of existence, no member has poured more vinegar into the wine than France. Last week, as the Common Market prepared to take the historic step of eliminating all remaining internal tariff barriers, the French acted according to form. Faced with a worsening balance of payments problem, Charles de Gaulle's government marred the milestone by announcing a protectionist package of import quotas and export subsidies.

The measures will affect at least 10% of France's total imports and a far bigger share of its exports. They include ceilings on such goods from abroad as autos, trucks, electrical appliances, textiles and a number of steel products. The subsidies come in the form of more liberal government credit for manufacturers engaged in exporting and indemnities to compensate for recent increases in their wage costs. At the same time, French Finance Minister Maurice Couve de Murville moved to curb inflationary pressures at home by warning that "severe measures" would be taken against excessive price increases.

Total Freeze. The French move was meant to minimize the jolt of this week's EEC action. Since its creation under the Treaty of Rome in 1957, the Common Market has gradually eliminated 85% of all internal tariffs. Now the last 15% will disappear. At the same time, the EEC will adopt common external tariffs, which will be automatically reduced by 40% in accordance with the Kennedy Round agreements. Also taking effect will be an agricultural common market with subsidized, uniform prices within the EEC and joint levies on imports from outside.

The tariff reductions would aggravate France's problems, since it has until now enjoyed some of the highest tariffs of any EEC member. The new French quotas are designed to keep imports of affected goods from rising any more than 15% above last year's levels. Yet in some cases the quotas will be tantamount to a total freeze on imports. Italy, for example, has sold at least 30% more appliances in France so far this year than it did in all of 1967--with the result that it has already exceeded the new French levels. Indeed, France's five Common Market partners, which last year accounted for 43.4% of the country's imports, stand to suffer the most from the quotas.

Quietly Determined. The U.S., meanwhile, was more immediately concerned about the export subsidies, which could put an added strain on its own trade position by increasing the flow of French goods into the country. As a result said William M. Roth, President Johnson's special representative for trade negotiations, the U.S. stood ready to "protect its interests" by imposing countervailing duties on French imports. Both American tariff law and the General Agreement on Tariffs and Trade provide for such duties; essentially they are designed to increase the cost of imports to offset government subsidies paid on products by exporting countries.

The U.S. has started to impose countervailing duties only in recent months on such specific items as Italian wire mesh and French tomato paste. Previously inclined to overlook export subsidies and other "nontariff" gimmicks, Washington assumed a get-tough stance not only to improve its payments position, but to placate those Congressmen and other domestic critics who feel that the U.S. has been too soft in its past trade dealings. "We are quietly determined," said one Administration official, "to fight fire with fire."

Defending his country's actions.

French Foreign Minister Michel Debre emphasized that they were temporary in nature, added that any U.S. retaliation would be "discriminatory." Most major trading countries felt that France had gone too far. Admittedly, the country has economic problems. Faced with a trade deficit of at least $1 billion over the next 18 months, it has already had to dig into its reserves (at the rate, reported the Banque de France last week, of over $300 million a week) to defend the franc. Nonetheless, Pans has barely touched its gold .hoard, still has enough total reserves--some $5 billion worth--to finance trade deficits for quite a while.

Although preparing to go ahead with its scheduled tariff reductions, the Common Market Commission reprimanded France at week's end for taking unilateral action without first sounding out its partners. A major concern, both within the Community and outside, was that the French move could set off a chain reaction of protectionism in other countries, nullifying many of the gains won in recent tariff agreements. Paris, having acted on its own, thus found itself standing on its own. But it gave no sign of reconsidering.

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