The Economy Turns--Toward a Trade War

MIDYEAR 1970 has been a kind of deadline for the Nixon Administration's economic "game plan." If inflationary recession is to give way to a combination of renewed business growth and slower price increases in time to save Republicans from November election troubles, the first signs must begin showing up now. They are doing just that, but the harbingers of a turn have not yet brought any loud cheering. At best, success for the game plan seems likely to be bought at painful cost--in corporate financial distress, in labor turmoil and, worst of all, in the resurgence of a nationalistic import protectionism that threatens to plunge the world into a trade war.

Price Break. The tone of business news has changed. Last week the Government reported that housing starts rose 11% in June, and industrial production in June dropped less than half as much as in May. More important, after six months of decline, real gross national product steadied in the second quarter. (Real G.N.P. rose at an annual rate of .3%, but the increase was so tiny as to be statistically insignificant.) As Administration officials had hoped, the engineered business downturn seems to have been prevented from skidding into a deep recession by a mix of remedies: higher Social Security payments, Government wage boosts and a Federal Reserve policy of again expanding the nation's money supply.

There are also grounds for optimism that the downturn has at last eased inflation. The nation's most comprehensive price index, the G.N.P. deflator, rose at an adjusted annual rate of 4 1/2% in the second quarter, v. 5 1/2% in the previous three months. Most of the decline reflected technical factors rather than basic change, but at least inflation has not grown worse. The consumer has felt little relief yet, but economists are encouraged by a recent drop in the wholesale price index of sensitive commodities, including eggs and meat. The stock market reflected the new atmosphere as the Dow-Jones industrials rose 35 points, to a week's end close of 735.

Yet any conclusion that the economy is bound to improve sharply at any time soon would be wildly premature. Many companies are still caught in a tough cash squeeze. The New York Stock Exchange, for example, disclosed last week that ten of its member brokerage firms are being liquidated. A business recovery could also be stopped dead by an auto strike in September. Labor militance has been aggravated by the economic downturn, and wage raises are as inflationary as ever. The Administration had expected just the opposite effect. Last October, a top Government economic planner asserted: "If I were a labor leader, I would not look for those 8% settlements any more." The statement only proved his incapacity to be a labor leader. Union contract settlements in 1970's first quarter averaged exactly 8%, v. 6.7% in the equivalent period last year, and the average undoubtedly rose in the second quarter.

The most ominous developments of all took place last week in the secret sessions in the U.S. Capitol's elegant Room H208 (which has become known to some congressional staffers as "the tiger cage"). As clumps of industry and labor lobbyists waited outside, the House Ways and Means Committee put on a display of protectionist logrolling that would have done credit to the authors of the Smoot-Hawley Tariff Act of 1930. What emerged was an inflationary, consumer-be-damned bill that could reverse the whole U.S.-led postwar movement toward freer trade.

Ways and Means Chairman Wilbur Mills, a backslid free trader, shrewdly senses the rise of protectionist sentiment among politically potent forces. The bill, which Mills expects to report out by month's end, would impose mandatory quotas on imports of foreign shoes and synthetic and wool textiles. Furthermore, it would force President Nixon to continue curbing oil imports by a quota system, rather than replace the quotas with a less restrictive tariff. The oil deal was wrapped up in eight minutes. Even that might be only the beginning. An omnibus provision authorizes the President to put quotas on any imported products that take as much as 15% of the U.S. market. If the provision becomes law, it could be used immediately to prevent many Americans from buying imported TV and phonograph sets, sheet glass, ceramic tile and leather gloves.

"Uncle Sucker." The surge of protectionism is a consequence of the nation's economic woes. Inflation has driven up prices of many U.S.-made products, leading manufacturers to clamor for barriers against imports. Rising unemployment has swung the A.F.L.-C.I.O. to the protectionist side; its lobbyists buttonholed Ways & Means members outside H208 last week to repeat time-worn restrictionist arguments. Sample from Union Lobbyist Liz Jaeger, who once championed free trade but is now campaigning for shoe quotas: "Shoes are vital for defense. An army has to have shoes to march on, doesn't it?" The A.F.L.-C.I.O. stand weighed heavily in the Ways & Means votes. Says New York Republican Congressman Barber Conable, a free trader: "It is awfully tempting when you can pick up labor votes on an issue like this."

The President is a self-proclaimed free trader, but last month he redeemed an ill-advised 1968 campaign promise by "reluctantly" backing textile quotas to help his Southern supporters. Other industries started calling for relief from import competition. Commerce Secretary Stans complained that the U.S. had become "Uncle Sucker" by lowering trade barriers while other nations kept them. Administration officials are horrified by the protectionist deluge that those comments provoked and are struggling to contain it.

Their prospects are not bright. House members have introduced 360 bills to impose quotas on imports as varied as mink, zinc, lead, electronics products, honey and strawberries. In the Senate, Indiana Democrat Vance Hartke is likely to press for mandatory quotas on foreign steel, and Western Senators probably will try to make the meat-import quotas still more restrictive. Even the most zealous supporters of free trade in Washington see little possibility of much modification in the bill.

Will President Nixon have the courage to veto the trade act that reaches his desk? His record in fighting for free trade is not impressive. On the other hand, he must realize that a great leap backward to the protectionism of the early 1930s would be disastrous. Two former chairmen of the Council of Economic Advisers, Walter Heller and Raymond Saulnier, last week warned that such regression would be highly inflationary. Competition from inexpensive imports is one of the few forces that have moderated U.S. prices.

If Congress enacts a Christmas-tree bill for protectionists, foreign countries are sure to retaliate against U.S. exports. Ironically, the U.S. surplus of exports over imports rose by $300 million in the second quarter, to a $3.8 billion annual rate. Administration officials fear that friendly governments might even be angered enough to begin redeeming for U.S. gold the dollars that they now hold. Such a move could shake the world monetary system because the U.S. does not have anywhere near enough gold to buy back all the dollars that chronic balance of payments deficits have deposited abroad. The economic isolationism and trade wars of 40 years ago prolonged and deepened the world Depression of the 1930s; the post-World War II move toward free trade has been a mighty engine of global prosperity. Abandonment of that progress for the sake of temporary relief for some high-price U.S. industries would be the height of economic folly.

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