Free Trade in Jeopardy

Pressures for protectionism under Orwellian euphemisms

Is free trade still possible? Economically, perhaps, but politically, in an industrial world still cursed by high unemployment and slow recovery from the 1973-75 recession, it is getting harder and harder to defend. The nine nations of the European Community, which, ironically, was founded precisely to free trade among its members, have put up barrier after barrier against foreign goods. In the U.S. two actions within the past fortnight have dramatized the growing clamor for restrictions against imports of steel, textiles, shoes, TV sets and dozens of other items. At the end of September, Zenith Radio Corp., the largest U.S. maker of TV sets, announced that it would lay off 5,600 American employees within the next year, because of competition from imports, and transfer much of its color-set production to Taiwan and Mexico. Responding to complaints from U.S. steelmakers, the Treasury Department accused five Japanese firms of "dumping" steel plate--that is, selling the product below cost in the U.S. The companies must post $50 million in bonds to cover the cost of penalty duties that might be imposed later by the Treasury.

The Treasury's action increased pressure for more severe restrictions on imports. That pressure is now coming from some former free traders, notably Democratic Representative Charles Vanik of Ohio. Last week Vanik called on President Carter to limit steel imports to 18% of the U.S. market (v. present imports of around 20%). He warned that if Carter does not, Congress might legislate a wide-ranging protectionist program next year. Said Vanik: "When you consider that about one-third of the House members are isolationist to start with, and you add onto that the 40 members who are concerned about textile imports, 18 to 20 members concerned with shoe imports, another 20 whose districts are affected by television and electronic imports, and about 100 that represent steel-manufacturing areas --you can bet that Congress will enact its own program next year if the President fails now, and it will be harsh."

Such talk worries European nations and Japan, which need U.S. sales to help speed their lackluster economic recoveries. But these countries are scarcely models of free-trade virtue. Within the Community, which has about 5.8 million unemployed workers, Britain limits imports of TV sets; West Germany is seeking to set quotas on Japanese ball bearings; France bars Italian wine; and Italy in May tightened restrictions on imports of Japanese motorcycles and parts. Some economists put much of the blame on protectionist measures in Europe and the U.S. for cutting the rate of growth in world trade almost in half, from 11% in 1976 to an expected 6% this year.

Policymakers of the European Community have begun promoting what they call "organized liberty of exchange"--an Orwellian euphemism coined by French Prime Minister Raymond Barre. It means negotiated agreements limiting imports during hard times. An American variant of that idea is the "orderly marketing agreement" (OMA), which is emerging as the Carter Administration's chief response to protectionist clamor.

The Administration has negotiated an QMA limiting imports of Japanese color-TV sets to 41% of their 1976 level (a restriction that obviously has not stopped Zenith from concluding that it will benefit by becoming a foreign manufacturer). Another OMA limits imports of shoes from Korea and Taiwan to 25% and 20% respectively. The Government is now under heavy pressure to negotiate an OMA in steel. One reason: privately owned U.S. companies have to compete with foreign mills that are either government-owned or heavily subsidized.

Whether an OMA would really help the steel industry is open to question. In a study sent to President Carter last week, the Council on Wage and Price Stability contended that restricting imports would not solve the industry's biggest problem: high costs brought on by a failure to modernize and by generous wage boosts. That problem illustrates one of the traditional arguments against protectionism: it saves industries only from the consequences of their own inefficiency. Another strong argument is that protectionism fans inflation by denying some consumers the chance to choose inexpensive imports instead of high-priced domestic goods.

The most talked about import restrictions would not make a significant dent in the U.S. trade deficit, which is heading toward $30 billion or more this year, as compared with $6 billion last year. True, about $7.5 billion of this year's deficit is in trade with the Japanese; $22.4 billion is with the OPEC countries, and the U.S. right now has no choice but to import their oil. The U.S. actually enjoys a surplus, though a declining one, in trade with the European Community (see chart).

In any case, for all their talk of organized free trade, European and Japanese policymakers would be angered by a steel OMA now. World trade talks are again in negotiation in Geneva; after getting nowhere for four years, U.S. and European negotiators have tentatively agreed on a plan to cut tariffs an average of 44% across the board. Such a reduction would help swing the talks toward ways of lowering trade barriers rather than raising new ones. But Belgian Foreign Minister Henri Simonet warns that a steel OMA might stop progress in the talks, and a U.S. Treasury official adds, "If we erect another trade barrier, the whole future of free trade as we know it is in jeopardy." If the Geneva talks fail, it is easy to foresee a truly vicious circle: protectionist moves further restrict the growth of global trade, keeping expansion of the world economy slow and unemployment in industrial nations high, provoking still more protectionist fervor.

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