Free Trade v. the New Protectionism

AT the highest levels, U.S. Government and business leaders are reappraising the nation's foreign trade policy.

The challenge of Japan is the major reason for this rethinking, but it is not the only one. A feeling has been growing that many nations are taking commercial advantage of the U.S. As a result, the movement toward freer trade

--which the U.S. has championed ever since World War II

--is in danger of stalling. The pendulum appears to be

swinging toward protectionism.

To assess the situation in trade, and to analyze some policy steps that the U.S. could take, TIME invited twelve top business decision-makers to an all-day meeting with editors of the magazine. The guests included eleven corporate chiefs, representing a spectrum of divergent interests and opinions, and an assistant to President Nixon (see box). Excerpts from the discussion:

Is protectionism rising in the U.S.?

DONALD KENDALL: I don't think anybody could possibly say that there has not been a move toward protectionism. There are more than 100 industries asking for protection. Another indication is what has happened in the labor movement. Labor has historically been on the side of freer trade, but the unions, except for the United Auto Workers and the aircraft unions, have pretty much switched to active protectionism.

PETER FLANIGAN: The U.A.W. stand is probably more a memorial to Walter Reuther than an expression of the sentiment of the members. Clearly, there is a great degree of protectionism in Congress. Agriculture has put up a strong barrier against protectionism in the past, but there is substantial erosion even there. Should there be an effort to expand meat imports substantially, I think you will find as big a split starting in agriculture as occurred in the unions.

DONALD McCULLOUGH: I would hope we could go through this symposium without drawing lines: protectionism v. free trade, the black hats v. the white hats. In this year 1971, the issues regarding international trade are much too complex to make such sharp distinctions.

ELY CALLAWAY: Rather than call it U.S. protectionism, I would call it a beginning toward an enlightened and reasonable economic nationalism. The rest of the world has practiced economic nationalism, but we have not.

THORNTON BRADSHAW: Each one of us is, I suppose, a free trader except with regard to his own industry.

RALPH LAZARUS: I am not sure that the public is aware of protectionism as such or free trade as such. Certain businesses are hurt because of inequities or because of more efficient competition from foreign countries. But if consumers were locked out from low-priced Japanese apparel, if the supply became limited and they had to pay higher prices, you would begin to influence them the other way.

What accounts for protectionist power?

C. PETER MeCOLOUGH: Along the freeways in Los Angeles, in the space of 15 minutes, you see six Japanese companies with large signs. You see Toyotas everywhere on the road, and everybody's second television set is a Sony. At the same time, the public is aware of the restrictions that are placed upon us in trying to make investments in order to bring our products to certain other countries.

WALTER WRISTON: Twenty years ago, it was appropriate for the U.S. to enter a race with a weight on its back as a handicap. Our productive capacity was such that we did not have to worry too much. Now we are aware of the fact that other countries have not honored their commercial treaties. We are aware of the discrimination of the Common Market against American exports in some 23 cases.

D. McCULLOUGH: We are playing under entirely different ground rules, the Marquess of Queensberry rules v. street fighting. Our foreign competition uses street-fighting rules.

How big and bad are the nontariff barriers?

GARLAN MORSE: I don't think the nontariff barriers--import quotas, discriminatory taxes and the like--are understood by the public or by industry or even by Government. But these barriers are so important that just to renegotiate the tariff scales back and forth to bring some equilibrium does not solve the problem.

WRISTON: Administrative practices are a major difficulty. You ship fruit over to the Common Market, and they have one inspector on the pier. With that delay, the fruit spoils before the ship can be unloaded. They say that they are not discriminating against us--it just happens that the other fellow's brother graduated from college that day and he went to the ceremony with his sister.

D. McCULLOUGH: We in the textile industry cannot ship much into Italy. The customs inspector goes out to lunch, and he never comes back.

FLANIGAN: We shouldn't ignore the nontariff barriers that the U.S. has put in place. Let's not delude ourselves by suggesting that we have been simon-pure. But our barriers are nothing compared with theirs, and we have to make every effort to bring theirs down.

What barriers does the U.S. create for itself in foreign trade and investment?

WRISTON: The export of the American mentality along with our goods and services does us a great disservice. For example, the Trading with the Enemy Act gets everybody who has a foreign subsidiary into trouble. The nations where these subsidiaries operate want them to trade with certain countries, but U.S. law forbids it. You have to interview the shrimp to find out whether they are Communist or Hong Kong shrimp.

C.P. MCCOLOUGH: It is very difficult to operate around the world with our antitrust laws. We cannot select a foreign partner and say, "We are going to work with you forever." This leads to great difficulty for us because we have to write agreements that are short-term when we really intend them to be longterm. I don't know any other government that makes companies obey not only the laws of the foreign nations where they operate but also certain laws of the home country. We are unique in that.

BRADSHAW: The U.S. operates with a huge albatross around its neck, and that is the albatross of its traditions. They are the traditions that brought about our antitrust laws and created the private enterprise system and made it anathema for anyone around this table to talk about the benefits of a corporate state. But that is what Japan is today. I would hope that we will consider today what it means to have national goals with industry and government working hand in hand toward those goals. Look at my industry, oil. I have been struggling to get a national energy policy instituted in Washington, recognizing that it must mean more controls for the oil industry rather than less; recognizing that we are going to have to give up vast portions of what we consider to be our inherent rights in free, private enterprise in order to arrive at an implemented national oil policy. There is a quid pro quo for the backing of the Government and that is to accomplish certain things for the nation and not necessarily for the company itself.

FLANIGAN: Japan's strengths are not so great that we must change our whole society in order to counter them.

Why are trade relations especially strained with Japan?

CALLAWAY: I cannot think of any major industry in America that is not subject to great invasion or attack by the Japanese. The problem is that the Japanese system is the most effective monopoly that has ever been developed in the economic history of the world. The Japanese will do whatever they need to do to take over whatever part of the richest markets in the world that they want to take.

D. McCULLOUGH: They zero in on a segment of our market and take it over. Then they will move into the next segment and the next.

C. WILLIAM VERITY: The Japanese have allocated tremendous moneys to building up their steel industry. In doing so, they have used the justification that if they cannot sell steel in their own market, they can always get rid of it in the U.S. In many cases, their price in Japan is higher than in either Europe or the U.S. They don't sell on the basis of profit but to fulfill a national need.

FLANIGAN: It is almost impossible to find out the true domestic prices of Japanese steel.

WRISTON: The British sent a group of chartered accountants to Japan for a six-month study to find out what it costs to build a tanker there. At the end of six months they had had a lot of hot baths and a lot of polite conversation, but they did not find out the real costs. A platoon of cost accountants could make it a life's work and still not find out.

CALLAWAY: Well, Burlington's spy system may be a little bit more effective than somebody else's, and we would be glad to service anybody for a fee and study the cost in your industry. I can tell you that on certain worsted fabrics in 1970, the Japanese textile industry sold its product at least 5% higher at home than in the U.S.

FLANIGAN: I think this view of Japan as an invincible monolith probably is not right. The thrust of the argument has been that because they can have a monopoly in Japan, then obviously they are going to be able to beat us. It is my understanding that American business in general feels that monopoly is bad, that it makes people less efficient.

C.P. McCOLOUGH: There are some Japanese computers coming into this country; yet my company cannot manufacture computers in Japan.

KENDALL: The road into Japan is about three inches wide. The road into the U.S. is about three miles wide.

RUSSELL DeYOUNG: Japan also has the ability to go into other countries and take our markets. We used to export to the Philippines, but now Japan is going in there and taking our market away.

WRISTON: Another thing is that they have complete exchange control, and the yen is not free. You can sell it for dollars or buy it for dollars only under limited circumstances. So a free market has never set an exchange rate for the yen. I think that is ridiculous. Until they have convertible currency, we will never know what their real trading power is. Everybody says the yen is strong. Let it go out into the world market to compete, and then we will find out.

What should the U.S. do--and not do--to help itself now?

CALLAWAY: We have to have some clout. We should go to Congress and get new legislation--trade laws that say that every nation has a fair and reasonable opportunity to sell its products here, but not to the extent that it can wreck any significant part of American industry or agriculture because of a system like a monopoly in Japan. Then we can call for reconvening of a meeting of GATT [General Agreement on Tariffs and Trade]. With the political clout of the laws having been passed in this country, we might have a pretty good opportunity to get the members of GATT to adopt some rules that would represent fair play.

ROBERT INGERSOLL: I would not like to see us get into a position where there would be retaliation against us from other countries. We had such an experience in the early '60s, when the glass and rug industries prevailed upon President Kennedy to raise tariffs because they were being injured. The Common Market did not retaliate in those industries, but it immediately put a 40% tariff on styrene-based plastics. My company happened to have built a plant in Britain, thinking we could ship into the Common Market, and the new tariff just cut us off. Foreign countries will hit you where you are most vulnerable.

C.P. MeCOLOUGH: We have to show the Japanese that if they are going to dump television sets, we will put an absolute embargo on them. In my experience that is the only way the Japanese are going to negotiate. Until you get their attention, until you have the power to club them over the head, they are not going to negotiate.

WRISTON: We have a Treaty of Commerce and Friendship with Japan, and it requires reciprocity of investment and trade. No one has ever leaned on them to really observe that. Japan also signed Article VIII of the International Monetary Fund,* yet their currency is not convertible. Nobody has leaned on them for that either, so far as I know.

CALLAWAY: If we could get the European Economic Community to ease its nontariff barriers and take 10% of Japan's exports, instead of only the present 2%, that would ease Japanese pressure on the U.S.

WRISTON: I have just been over to Europe, and I got this curve ball thrown into every conversation. They would say: "Why don't we join hands against Japan?" I would say: "You have textile quotas against Japan; why don't we join hands and lower those, too?" And they would say: "You don't understand the problem."

KENDALL: Through its import quotas and other barriers, Japan now maintains import restrictions on 80 items that are in violation of the General Agreement on Tariffs and Trade. Under the GATT arrangement, we can project what these violations cost our industries in total dollars and then stop an equivalent amount of Japanese goods at our own borders.

FLANIGAN: It would be nice to take that proverbial two-by-four and get somebody's attention. But Japan has reduced its items in violation of GATT from 120 to 80, and we expect the number to be down to 40 by September. Meanwhile, we are attempting to negotiate an extension and tightening of the voluntary limitations on steel imports. We have negotiated a voluntary limitation on stainless-steel flatware. We are now talking about shoes, and we may attempt to solve that problem by a voluntary limitation. Is it appropriate that while we are discussing these voluntary limitations with the Japanese, we take off after them on their remaining GATT violations, when they are already reducing them?

What is the case for free trade?

LAZARUS: When you put up a barrier and there is retaliation, the consumer ends up losing something. I am not sure all industries should be protected when they are threatened by foreign trade. For instance, in the shoe situation: Italy knocked the socks off the U.S. by developing shoe styles that hit right with the trend of dress and the predominant fashion today. They beat our industry not nearly so much in price as in style. That kind of thing is important to the U.S. consumer. You have to put the consumer's interest first. BRADSHAW: The question ought to be, what are the goals that we are trying to accomplish? Are we trying to protect every industry in the U.S. in its present form? Are we trying to maintain full employment by erecting trade barriers? Are we trying to protect high labor wages? Are we trying to protect our current technology? Are we trying to freeze our economy? I could not agree with most of these objectives. We can start with selecting of certain industries that are essential to the basic economy of the U.S., and they must be protected in some way. Beyond that, I don't think that we should hamper the free flow of trade to the building in of rigidities that are likely to strangle us in the end.

WRISTON: I am not sure that we should throw away the benefits of free trade because at the moment we haven't found the levers of power to pull to compete against Japan. To remedy our present problem, we will have to examine many things: our antitrust policy, our policy of excluding unions from antitrust legislation, our tradition of the natural antipathy of business and Government. The way to fix our problem is not through an escalating trade war but through opening up markets of the world to more goods. Protectionism is a losing game any way you play.

*Article VIII of the IMF agreement forbids the fund's 117 members to maintain exchange controls except under "special or temporary" circumstances.

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