Building Walls Abroad

"I've got no compulsion to settle." With those cool words, John Connally continued to play his risky poker hand in the high-stakes game of international money. Publicly, at least, the Secretary of the Treasury refused to soften the Nixon Administration's economic moves, which have upset and unsettled the trading world. Foreigners were increasingly angered by what they perceived to be brutally nationalistic U.S. policies--the 10% surtax on most imports, the proposed "buy American" investment credit at home, and the demand that other nations revalue their currencies upward against the dollar. A Canadian diplomat complained in Ottawa: "America seems to have acted without considering the wider implications, without a clear plan or purpose for the future."

In the chancelleries and the countinghouses of major capitals last week, worry spread about the possibility of a decline in world trade, leading to a further global economic slowdown and perhaps a recession. Not all of the concern could be laid to Nixon's New Economic Policy. A decline in the previously vigorous rates of economic growth abroad was well under way last spring.

But continuing shock over U.S. policy and confusion over the future of money have aggravated the slowdown and wiped out hopes for a recovery by year's end. French Finance Minister Valery Giscard d'Estaing, whose country is certainly not the worst hit, last week noted the dimmed prospects for the world economy: "The period of rapid economic growth," he said, "is past history."

Laying Off. In many parts of Western Europe, unemployment is creeping up while steel production is in a decline and demand for export-import financing is flagging. Italy is in the deepest trouble. Plagued by strikes and absenteeism, industrial production is running 3% lower than last year, while prices are 5% higher. Fiat, the automaker, has placed 8,000 workers on a short week; tiremaking Pirelli is offering workers in the Milan area cash gifts to quit. Zanussi, Italy's biggest electric-appliance manufacturer, plans to lay off 9,420 by year's end. Refrigerator producers reckon that the price of one of their popular models in the U.S. will rise from $89 to $109. The Italian bourse is at a 15-year low, and the government plans to offer tax incentives to stimulate lagging investment.

In Germany, even with unemployment under 1%, some businessmen are talking of a Wirtschaftskrise (economic crisis). Industrialists estimate that the import surcharge and de facto revaluation of the Deutsche Mark will mean a 30% drop in the sale of German goods to America. Steelmakers put 11,000 workers on short hours, and the angered men marched through the streets carrying signs of protest. While industrial profits are falling, the cost of living is nearly 6% higher than a year ago.

Sweden is in one of its worst economic slumps since the 1930s. Switzerland's balance of payments is running a deficit for the first time in ten years. Of the major European powers, only Britain and France show signs of strong growth--around 5% each for the fiscal year ending mid-1972. Still, the U.K. expects unemployment by Christmas to reach a 30-year high of 1,000,000 (out of a labor force of about 25 million).

Shrinking Orders. The slump has spread beyond Europe. In Japan the economic growth rate declined from 12.1% in 1969 to just under 11% last year, and it is expected to tumble this year to less than 6%. To the Japanese, that figure reflects a total recession if not calamity. New orders for industrial goods declined 90% in August, when Japan was hit by the "Nixon shokku." They are still down 50%. Hitachi and other electrical manufacturers are cutting hiring plans for next year. To invigorate the economy, the government is infusing large sums into public projects like high-speed railroads; it is also reducing income taxes by $460 million to spur consumer buying.

The developing countries of Latin America, Asia and Africa find little comfort in the fact that agricultural products and raw materials are exempt from the U.S. import surcharge. Such goods constitute 70% of the developing nations' exports to the U.S., but it is the remaining 30%--manufactured goods --that offer the greatest growth potential for exports.

Two-Way Street. For all the cries of pain abroad, Connally continued to talk tough. At an American Bankers Association convention in San Francisco, he said of his foreign critics: "The truth of the matter is that they liked our deficits a whole lot better than they like us getting rid of them." The U.S. will keep the surcharge, he vowed, "until we're satisfied that a mechanism is in place that can rectify our balance of payments." But what if foreign governments retaliate against the U.S.? Connally's answer: "Retaliation is a two-way street, and the U.S. is the biggest market in the world."

The first ominous signs of trade reprisals against the U.S. have already begun to appear. Unlike the revaluations and lower barriers to American products that the U.S. is seeking, the new moves resemble the trade battles of the early 1930s, when a round of tariff increases did much to set off a world slump. To help protect its balance of payments, Denmark's government imposed a temporary 10% surcharge on more than half its imports. Henri Ziegler, head of the French company that is building the Concorde supersonic transport, urged France to press the Common Market to erect a 15% customs barrier against imports from the U.S.

Driving Them Together. Last week, finance officials of the Group of Ten, the rich industrial nations, met again in Paris to consider ways to counter what Europeans are calling the ambitious and exaggerated U.S. payments goals. The meeting broke down in disagreement over realignment of currencies against the dollar. France held out against an upward revaluation of the franc and for devaluation of the dollar. From the U.S., Connally made an attempt to divide the Europeans by hinting that the U.S. might remove the import surtax for West Germany alone as a reward for letting the mark float upward. Ralf Dahrendorf, Common Market commissioner for external trade, noted that the attempt "only seemed to drive us together."

The grinding erosion caused by monetary and trade uncertainty may yet affect U.S. ambitions for turning its payments account around by a huge $13 billion. If economic growth abroad continues to falter, foreign businessmen and union leaders may well insist that their governments raise still higher barriers against imports. In that case, they would also resist pressure for currency revaluations that would make U.S. goods more competitive in world markets. Raymond Barre, French vice president of the Common Market Commission, warns, "In this affair, time runs in no one's favor. It runs against everyone, the U.S. included." Unless the trade bars are soon brought down, protectionism will merely build more protectionism.

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