Socking It to Imports

By George Russell

"We are always willing to be trade partners, but never trade patsies."

With those feisty words in his State of the Union address, Ronald Reagan last week heralded what may be one of the major initiatives of his remaining years in office: a new assault on America's horrendous trade deficit. The President was also signaling an important change of tactics. After two years of beating back congressional efforts to pass protectionist trade legislation, the White House is about to bring forth an omnibus bill that seeks to toughen trade laws and enhance American competitiveness. The Administration initiative, which will reach Capitol Hill in late February, is part and parcel of an aggressive U.S. posture toward some of its closest economic partners. Coming at a time when the air is already thick with international trade recriminations, the new thrust carries a major risk: that it will do less to alter the commercial balance than to bolster the increasingly strong protectionist forces that threaten to gnaw away at world economic growth.

Continuing bad news on the international trade front, and the passion that it arouses, had finally made Administration action politically unavoidable. Last week the Commerce Department revealed that the trade deficit for 1986 totaled $169.8 billion, a record. The only bright light in the dismal picture was the fact that the monthly deficit in December was only $10.7 billion, down dramatically from the $19.2 billion recorded a month earlier. That may be a sign, though not a definitive one, that the continuing slide of the U.S. dollar against the Japanese yen and the West German mark, which makes U.S. products cheaper abroad and imports more expensive, is finally having some effect on the trade balance.

The depressing trade numbers have long threatened to drive the U.S. and some of its best friends into a slugging match. Just two days after the President spoke on Capitol Hill, negotiators for the U.S. and the twelve- member European Community reached an eleventh-hour compromise that narrowly averted a major international trade war. Last March the E.C. effectively cut off some $400 million in U.S. grain exports to Spain after that country entered the Community. Unless adequate compensation was provided, the U.S. said, it would impose crippling 200% duties at 12:01 a.m. last Friday on such Community exports as British gin, French cognac and Dutch cheese. Finally, about four hours before the deadline last week, a settlement was reached and the shoot-out was called off.

As the European trade drama wore on, U.S. negotiators in Tokyo were engaged in yet another hammer-and-tongs trade session. A team led by Commerce Department Under Secretary Bruce Smart and Deputy U.S. Trade Representative Michael Smith was trying to pry open Japanese markets for U.S. companies in a number of sensitive sectors, including supercomputers, semiconductors and civil-engineering services. After four days of talks Smart described the results as "mixed." Smith hinted that April 1 might be the deadline for another sharp confrontation with Japan, which last year enjoyed a $58.6 billion trade surplus with the U.S.

On the other hand, the Japanese government had trade news of a different sort for U.S. auto manufacturers. For the seventh consecutive year Tokyo announced that it would continue a program of voluntary export quotas on cars destined for the U.S. This year's ceiling of 2.3 million vehicles remained the same as in the two previous years. Japanese automakers termed the government restraints a necessary evil to avoid a flare-up of U.S. protectionist sentiments.

Warding off such a flare-up is also, paradoxically enough, the real goal behind the Administration's new initiative. The basic aim of the package is to strengthen America's bargaining hand with foreign competitors without giving Congress the opportunity to make use of such blunt instruments as sizable tariffs and other devices that would provoke retaliation and choke off trade wholesale.

Some of the elements of the Administration package have been known for weeks. One is a $1 billion federal fund to retrain up to 900,000 U.S. workers in a bid to enhance U.S. competitiveness, a favorite Washington buzz word. Another is a doubling of the National Science Foundation's budget over the next five years, to $3.2 billion, to help buttress U.S. research and development. The Administration also wants to strengthen existing laws designed to keep foreign manufacturers from dumping goods in the U.S. at prices that are less than the cost of production. Among other things, the White House wants to stop companies that are evading those restrictions by shipping underpriced components, rather than fully assembled products, into the U.S. marketplace.

A more important element of the package, in the long run, is a proposal that would help the White House twist arms more effectively when dealing with foreign competition. The Administration suggests that the entire trading relationship between the U.S. and any alleged offending country be a factor in considering retaliation for any unfair trading practices. That would allow the Administration formally to take into account any U.S. trade deficit or surplus with each country, as well as the openness of both national marketplaces to similar export products. Theoretically, Washington could then impose tariffs or trade quotas on those that have a trade surplus with the U.S. The fact is that the Administration already takes such factors into account on an unofficial basis. Writing the conditions into law, however, would give them considerable extra force.

Yet another measure the Administration wants to enact might make things tougher for American rather than foreign industries. Under current U.S. laws American firms can apply to Washington's International Trade Commission for protection against foreign imports, whether those imports are fairly traded or not. The ITC investigates those claims to determine if such industries have been seriously injured. The new White House proposal would require the ITC to determine whether protectionist remedies would make a given U.S. industry more competitive in the future. Only then would the ITC be able to recommend such cures.

All the Administration's proposed measures are considerably more subtle than the kind of blunt protectionist strictures that have been championed with increasing vigor on Capitol Hill. In past years the White House was able to rely on the Republican-dominated Senate to help keep such sentiments under control. Last August those loyalist forces helped Reagan sustain, although narrowly, a presidential veto of a protectionist trade bill that had passed both the House and the Senate. That bill took a piecemeal approach, among other things setting a new system of country-by-country quotas on imports of textiles, shoes and copper from such places as Taiwan, South Korea and Thailand.

This year the Democrats control both legislative chambers, and a presidential veto alone does not appear to be enough to stem the protectionist tide. Democratic Representatives have resubmitted a tough trade bill that the House passed last year but that died in the Senate. Included in that bill is a controversial amendment sponsored by Democratic Representative Richard Gephardt of Missouri. It provides that countries with highly protected domestic markets that run large surpluses with the U.S. would face automatic trade restrictions unless the surplus is reduced by fixed percentages annually. Gephardt's proposal would remove virtually all presidential discretion in dealing with such bilateral trade difficulties.

At the White House the issue may be whether the Administration's latest package will prevail in the face of rising congressional impatience. Outside political circles, however, a number of economic experts have another concern: that in its commendable efforts to temper protectionism on Capitol Hill, the Administration is being forced to strike worrisome compromises with some of its free-trade principles.

Since 1982 the Administration has negotiated no fewer than 18 agreements with steel-producing countries that limit exports to the U.S. market. Last year, as the trade hue and cry rose once again on Capitol Hill, the Administration pressured Japan and Taiwan into limiting their exports of machine tools to the U.S. for five years. When West Germany and Switzerland refused to go along with such "voluntary" restraints, Washington set quotas that rolled back their exports to levels set in 1981 and 1985. Also in 1986, the Administration negotiated separate agreements with Taiwan, Hong Kong, Japan and South Korea that limited the growth of their textile exports to the U.S. to 1% or less a year. Argues William Cline, a senior fellow at Washington's Institute for International Economics: "The Administration's actual record is considerably more protectionist than its ideology."

Such trade restrictions have had a large cumulative impact. Michael Aho, a senior economist at Manhattan's Council on Foreign Relations, estimates that in 1981 approximately 25% of all U.S. imports were subject to some form of government limitation. Now the total is 40% and, observes Aho, the "tendency is definitely for more." On the other hand, Claude Barfield, coordinator of trade policy at the American Enterprise Institute in Washington, lauds the Administration for its continuing antiprotectionist restraint in the face of pressure to enact much more sweeping measures. The latest White House trade initiative, he points out, is a "balancing act between politics and economics. They've played this game with a fair amount of success."

But that precarious balancing act could collapse if the trade deficit continues to pile up at its present pace. Unless the decline of the dollar slashes the deficit soon, the Reagan Administration's measured trade initiative could be swept away by the more vociferous forces of outright protectionism.

With reporting by Gisela Bolte and Jay Branegan/Washington