World Trade: A Clash of Wills

A MONTH ago, the initial response in foreign countries to President Nixon's economic blockbuster was a curious mixture of shock and sympathy. Although bankers, businessmen and government officials were stunned by the President's decisions, many said that Nixon was justified in taking drastic action to buttress the dollar. Last week quite a few of those leaders began to express a very different set of feelings. In Europe and Japan, they were muttering that the U.S. is refusing to compromise in solving major international problems that are largely of its own making.

Foreign nations have been injured by three parts of the President's program. The 10% surtax has obviously made many foreign-produced goods less competitive in the U.S. market. On top of that, the proposed investment tax credit for business does not apply to the purchase of imported tools and machines; U.S. businessmen must "buy American" to take advantage of the boon. Finally, some foreign leaders --particularly in France and Germany --are upset because the U.S. has refused to devalue the dollar by raising the price of gold. Instead, Washington is holding out for them to revalue their currencies upward, which would make their goods still costlier--and less competitive--in some world markets. Last week the Common Market's executive commission formally demanded an outright dollar devaluation.

Foreign critics frequently ignore their own protectionism. U.S. businessmen face enormous tangles of restrictions on trade and investment, notably in Japan (see following story). For years, U.S. trade negotiators have tried in vain to persuade their counterparts abroad to bargain seriously on these inequities. Nixon's program is designed to jolt them into much-needed negotiations. What disturbs foreign leaders is the possibility that the President might become so enthused by the domestic popularity of his program that he will push them too hard, demand too much, and retain the surtax too long.

Countermeasures from Tokyo. Japan, which stands to lose more than any other nation under the Nixon program, showed a deepening resistance toward it. Last week five Japanese ministers traveled to Washington for an annual meeting with U.S. Cabinet members, which concentrated heavily on problems of the "Nixon shocker," as it is called in Japan. Nixon and Secretary of State William Rogers made elaborate personal gestures aimed at underscoring the basic Japanese-U.S. friendship. Rogers took the delegation of visiting Japanese and their wives to a performance of Leonard Bernstein's Mass at the Kennedy Center for the Performing Arts. Nixon invited them to a White House dinner later in the week.

For all the politeness, however, both sides were quite firm and explicit in restating the chasmal disagreements between the two nations. Rogers, speaking "directly and candidly," demanded a substantial revaluation upward of the yen, elimination of Japanese restrictions on U.S. imports and a "dramatic" increase in Japanese aid to developing countries. Japanese Foreign Minister Takeo Fukuda, who is a leading candidate to replace 70-year-old Prime Minister Eisaku Sato, was prepared to make one concession. He announced that Japan will remove import quotas on several U.S. products, including soybeans, light aircraft and air conditioners. But he was adamant in rebuffing demands that the U.S. considers to be far more crucial. Most notably, Fukuda refused to consider an upward revaluation of the yen, which has risen about 6.5% --far less than the U.S. wants--since Tokyo reluctantly decided to float it against the dollar last month. He also suggested that U.S. manufacturers would benefit from "more aggressive salesmanship," and told Rogers that the surtax must be quickly rescinded, hinting that Tokyo might otherwise be forced to use "countermeasures."

Reparations Argument. The mood in Europe also grew darker. It was not helped by a parade abroad of official American flag wavers, who have tried to hard sell the U.S. program in rather unconciliatory terms. Paul Volcker, Under Secretary of the Treasury, irritated the French by telling them that Nixon, for political reasons, will be unable to devalue the dollar. In Brussels and Paris, U.S. ambassadors and their aides summoned groups of resident U.S. businessmen to advise them that foreign governments actually approved of the Nixon program and that the U.S. position should be, "We don't apologize for anything." Speaking at a Paris news conference last week, Senator Jacob Javits invoked what has become the World War II reparations argument. "Europe still owes us a great deal," he said.

European business leaders strongly disagree. They have long pointed out that the current U.S. balance of payments deficit is much more directly a result of the Viet Nam War than of the long struggle to contain Communism in Europe. In addition, they note, part of the dollar outflow was caused by U.S. inflation, which made it more profitable for American businessmen and bankers to invest in European projects than in opportunities at home. "Nixon's campaign is not so much economic as patriotic," says the chairman of a large Belgian bank. "Patriotism and clarity of thought are almost always incompatible."

Though Europeans were united in their distaste for Nixonomic rhetoric, they could agree on little else, least of all on their response to it. The sharpest policy split in Europe divides France and West Germany. The French insist on maintaining a fixed exchange rate against the dollar on commercial transactions, while the Germans contend that all nations, at least temporarily, should float their currencies against the dollar, as Bonn did last May.

Flight Toward Protectionism. While the Europeans debated, the Canadians made the first overt move aimed at interfering with the effects of Nixon's program. Prime Minister Pierre Trudeau proposed to Parliament the creation of an $80 million fund that would reimburse some Canadian companies for up to two-thirds of the U.S. import surtax on their products. The measure is expected to pass easily and would have the effect of encouraging Canadian producers to absorb the surtax themselves rather than pass it along to U.S. consumers, as Nixon intended. Trudeau acted partly to fend off any increase in Canada's already high level of unemployment (6.3%) and partly because Canadian businessmen feel that the Nixon program violated a "special trading relationship" between the two nations.

The temptation to retaliate is being voiced especially in Common Market nations. Says an official of Siemens A.G., West Germany's largest electrical manufacturer: "We fear the flight of the largest industrial nation of the world toward protectionism will be the signal for others to follow suit." Adds Jacques Rueff, the French economist who was De Gaulle's prophet of the gold standard: "By setting up an import tax that breaks the previous agreements, America has shown us the way."

If the U.S. is to prevent a worldwide retreat to economic nationalism and protectionism, it must eliminate the surtax soon. Another danger of stretching out the tax is that Nixon could find himself bound to it longer than he wants. Many U.S. businessmen have pleaded for protection, and they will quickly grow attached to the surtax. Particularly in an election year, the President may find it difficult to disturb their comfort.

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