Dropping the Other Shoe

By Barbara Rudolph.

For more than ten years now, foreign shoemakers have been walking all over their American rivals. Stylish and inexpensive leather footwear from such countries as Taiwan, Brazil and South Korea will account for some 75% of sales in the U.S. this year. But if American manufacturers have lost the battle in the marketplace, they have tried to recoup in the political arena. For more than a year the industry has been waging a campaign to persuade President Reagan to impose quotas on shoes made overseas. Enlisted in the effort were 168 Congressmen, 40 Senators and 20 Governors, who sent letters or telegrams to the President. Shoe workers staged a two-day vigil in Lafayette Square, across from the White House.

The industry, however, has been no more successful in politics than in shoe stores. Last week the President resisted the pressure and refused to approve shoe quotas. "Protectionism is both ineffective and extremely expensive," he said. "It is a crippling cure, far more dangerous than any economic illness."

At the same time, Reagan announced that he would soon be taking measures to open overseas markets to American companies by aggressively moving against unfair trading practices. Said he: "We must continue to insist of our trading partners that free trade also be fair trade."

The Administration's rejection of relief for the shoe industry is sure to exacerbate the clamor in Congress to impose quotas, raise tariffs and otherwise stifle free trade. There are now more than 200 bills on Capitol Hill that seek aid for products ranging from petrochemicals to waterbed liners. As the trade deficit grows to an estimated $150 billion this year, the drive to block imports is gaining momentum.

"The protectionist pot is about to boil over," Senate Majority Leader Robert Dole proclaimed two weeks ago in Japan, where he headed a Senate trade delegation. He added, "I have never seen stronger congressional sentiment for acting on the trade front." Says S. Bruce Smart, Under Secretary of Commerce: "Industries have collectively created a fire storm of concern on Capitol Hill." Calls for tough action on imports are widespread. Senate Republican Charles Grassley of Iowa declared last week that "the Administration's approach has gotten us nowhere." Republican John Danforth of Missouri called the President's decision a "very serious mistake. It puts more and more pressure on Congress to answer the bell of every affected industry."

Last May the International Trade Commission decided that shoe imports were causing "serious injury" to the domestic industry. The I.T.C. in June ruled, 4 to 1, that the Government should limit imports of nonrubber shoes valued at more than $2.50 to 474 million pairs for the first two years of a five-year quota plan. Such a program would have stepped on plenty of toes. Footwear prices would probably have risen by as much as 15% in the first year. While protectionist measures may save some jobs, consumers almost always suffer because the limit on supplies drives up prices. The Federal Reserve Bank of New York last week released a study showing that restrictions on the imports of autos, sugar and clothing last year cost U.S. consumers more than $14 billion, or $228 per family.

Protectionism is a politically sensitive issue that is never far below the surface. The new militancy in Congress dates back to March, when Reagan invited the Japanese to eliminate four-year-old restrictions on car exports to the U.S. The measures were first implemented when Detroit was losing billions of dollars a year, but they seemed unnecessary now that American automakers are turning in record profits. In addition, experts calculated that the quotas were raising the price of Japanese autos in the U.S. by an average of $1,300.

After the Administration action, the Japanese announced that they would increase auto exports to the U.S. this year by 24%. That set off an explosion in Congress. The Senate passed, by a vote of 92 to 0, a nonbinding resolution urging the President to pressure Japan to open its markets further. The House passed a similar measure 394 to 19. "I've been a free trader all my life," said Texas Democrat Lloyd Bentsen. "But it isn't working anymore."

Such views are increasingly common on Capitol Hill. When Congress returns this week from its August recess, trade legislation will be a top item on its agenda. One of the first bills to be considered is a measure to slash textile imports by up to 30%. The proposal has 290 co-sponsors in the House and 54 in the Senate. An even more sweeping bill, grandly titled the Trade Emergency and Export Promotion Act of 1985, would require such countries as Brazil, Taiwan, Japan and South Korea to cut their trade surpluses with the U.S. by 5% within a year. If they refused, a 25% duty would be charged on all their exports.

No one can dismiss the yawning trade gap, as few industries have escaped the onslaught of imports. High tech and low tech, capital goods and farm products have all suffered. The U.S. has traditionally enjoyed a large surplus in technology trade, but it has diminished from $26.6 billion in 1980 to only $6.2 billion in 1984. In the third quarter of last year the U.S. imported more high-tech products than it exported. Agricultural exports have dropped 27% since 1981 and may total only $32 billion this year.

The U.S. is now running trade deficits with almost every major country. About one-third of the deficit, nearly $50 billion, is with Japan. But Japan is not the only problem. The U.S. deficit with newly industrialized Taiwan, Hong Kong, Singapore and South Korea will be more than $20 billion this year. Even in Europe, with which the U.S. has traditionally run a large trade surplus, it may run a $20 billion deficit.

The strong dollar is the main factor behind the trade troubles. Although the value of the American currency has declined by 12% since its February highs, the dollar is still worth 52% more against the West German mark and nearly 100% more against the French franc than in 1980. The dollar's strength results in large part from the country's huge and continuing budget deficits. This makes foreign products cheaper in the U.S. at the same time that American products are more expensive abroad. Says Clayton Yuetter, the U.S. Trade Representative: "The reason we are having this crescendo of protectionism is because the dollar has been strong for so long."

Still, the strong dollar is not the only force behind the trade deficit. The U.S. economy has been booming for the past two years, sucking in imports from nations that have grown less rapidly. Further, U.S. exports are expensive because they are produced by workers who are far better paid than many of their counterparts abroad.

Many American businessmen claim that the trade gap is also the result of restrictions that keep their products out of foreign markets, particularly in Japan. Three months ago the Semiconductor Industry Association filed a complaint charging that the Japanese government has attempted to close its market to American semiconductor products. An investigation into the charges will take a year. In the meantime, many American executives find their tempers stretched as thin as a silicon wafer. Says Andrew Grove, president of Intel, a Santa Clara, Calif.-based electronics firm: "I used to believe in free trade, but the only thing that will work on the Japanese is brute force in trade negotiations."

The mounting calls in the U.S. to restrict imports have European and Japanese officials deeply worried. "If protectionism really takes a hold in the United States, the whole future of the world's free-trade system will be put at risk," warns Willy De Clercq, the European Community's Commissioner for External Relations.

The Japanese do not seem to know what more they can do to stem the protectionist tide. Tokyo last month announced plans to reduce or eliminate tariffs on 1,853 items, including telecommunications equipment, plywood and wine. But that did little to calm those calling for restrictions on Japanese products. When Senator Dole was in Tokyo, he urged Japan to remove more trade barriers and bluntly warned that "time is running out." Prime Minister Yasuhiro Nakasone replied, "I'm doing the best I can." He has sympathy on this side of the Pacific. A survey in July reported that 53% of those polled believe that Japan is being used as a scapegoat for U.S. economic problems.

While Reagan withstood the pressure from protectionists on shoes, it is still to be seen how successful his fair-trade steps will be. Administration sources report that they will first act against so-called intellectual unfair trade practices. Examples: counterfeit products and copyright violations. In taking these actions, the Administration aims to deflect protectionist sentiment in Congress. In Santa Barbara last week, Reagan aides were examining foreign-made goods, including auto parts and birth-control pills, that were direct copies of U.S.-manufactured items. Later this month the Administration may call for legislation to give the President more authority to retaliate against unfair trade practices. But congressional pressures to block imports are so strong that Reagan may be forced to come up with still tougher measures.

If a trade war does erupt despite the Administration's best efforts, the U.S. economy would seriously suffer. American trade restrictions could be met by more restrictions from other countries, which would hurt sales of American products abroad. Explains Sidney Jones, Commerce Under Secretary for Economic Affairs: "The U.S. is the world's largest exporter. We have the most to lose from protectionism." It is a lesson lawmakers should not forget during this period of heated rhetoric.

With reporting by Gisela Bolte/Washington and Yukinori Ishikawa/Tokyo