Upsurge in Protectionism

By Charles P. Alexander

Subsidies, tariffs and "voluntary "agreements erode free trade

Free trade, one of the greatest blessings that a government can confer on a people, is in almost every country unpopular.

--Thomas Babington, Lord Macaulay

Those ironic words, written in 1824 at a time of fierce economic nationalism, are still true today. The system of free trade that blossomed after World War II and helped propel a quarter-century of unmatched world prosperity is now under attack. In the wake of a recession that has left 24 million people out of work in the U.S. and Western Europe alone, more and more businessmen, labor leaders and politicians are demanding protectionist barriers against foreign competition.

Struggling to avoid an all-out trade war, governments of the industrial countries recently negotiated numerous "voluntary" agreements to limit commerce. The European Community, for example, promised the U.S. to hold steel exports to an average of only 5.4% of the American market. Europe won assurances from the Japanese that they would restrain exports of autos, light trucks, quartz watches, hi-fi equipment, computer-controlled machine tools and television tubes. Japan also agreed to put a 1.68 million ceiling on its auto shipments to the U.S. for the third straight year. The Geneva-based trade organization GATT (General Agreement on Tariffs and Trade) estimates that roughly half of world commerce is affected by some form of government intervention, up from 40% in 1974.

President Reagan last week underscored the urgency of trade issues by proposing a Cabinet-level Department of International Trade. If approved by Congress, the new agency would consolidate and replace the Commerce Department and the Office of the Trade Representative, which have overlapping and often conflicting jurisdiction on trade matters. Said Secretary of Commerce Malcolm Baldrige, who announced the plan: "We need a stronger, more consolidated voice for free trade."

The Administration's commitment to free trade, however, has been shaky. While the White House has withstood the demands of groups like the lumber and machine-tool industries that it raise tariffs or slow the pace of imports, it last month increased, from 4.4% to 49.4%, the duty on large Japanese motorcycles, which have captured 85% of the U.S. market. That action came after a plea for help from the Milwaukee-based Harley-Davidson Motor Co., the lone survivor of 143 companies that once made motorcycles in the U.S. The Administration will soon face a new test of its free-trade philosophy. Last week the International Trade Commission unanimously recommended that the U.S. set quotas limiting the import of some steel products for three years.

More and more American businessmen argue that free trade is a nice theory that no longer works because foreign governments consistently subsidize industries to give them an advantage in international competition. A Commerce Department study showed, for example, that government help to European steelmakers amounted to as much as 41% of the value of their products. In response, other nations charge that the U.S. has its own array of subsidies, including low-cost financing through the Export-Import Bank to customers who buy American goods.

Ever since Adam Smith set out the case for free trade in 1776 in Wealth of Nations, virtually all economists have maintained that such a system benefits all countries. But governmental meddling in commerce has called the theory into question even in academe. Says Alan Deardorff, economics professor at the University of Michigan: "The old arguments for free trade aren't enough any more because other nations have so often intervened." Observes Harvard's Raymond Vernon: "It has gradually dawned on Americans that the model of free trade we had in mind [after World War II] was one that no one shared." A group of economists at Britain's Cambridge University is openly advocating steep, across-the-board tariff hikes on imports.

The most important trade battles are taking place in such high-technology industries as electronics, robotics, communications and aircraft. A blue-ribbon panel of corporate executives, university presidents, economists and other experts assembled by the National Academy of Sciences warned last month that the U.S. is in danger of losing its technological leadership, in part because other countries are protecting and subsidizing key industries. The group noted, for example, that Airbus Industrie, an aircraft manufacturer financed by the governments of France, West Germany, Britain and Spain, is challenging the dominance of private U.S. companies like Boeing in the commercial-jetliner market. Since 1974 the American share of world sales has slipped from 92% to 82%, while Airbus' has surged from 1% to 15%. Says Howard Johnson, who headed the NAS panel and is chairman of the Massachusetts Institute of Technology: "When we see our high-tech sectors coming under pressure from unfair foreign industrial policies, then as a last resort we should match those policies to make our industries more competitive. We may have to play hardball in the short run."

But if all nations play hardball, their consumers will pay dearly. Most economists agree that industries nurtured and shielded by governments become inefficient and have little incentive to hold down costs. Protectionism, notes Murray Weidenbaum, former chairman of Reagan's Council of Economic Advisers, keeps prices artificially high and thus acts as a "hidden tax on the consumer."

President Reagan summed up the case against protectionism in a recent speech, saying, "We and our trading partners are in the same boat. If one partner shoots a hole in the bottom of the boat, does it make sense for the other partner to shoot another hole in the boat? There are those who say yes and call it getting tough. I call it getting wet." The President neglected to mention that he has on occasion yielded to political pressure and got himself wet.

--By Charles P. Alexander.

Reported by Bernard Baumohl/New York and Patricia Delaney/Washington

With reporting by Bernard Baumohl/New York and Patricia Delaney/Washington This file is automatically generated by a robot program, so viewer discretion is required.