Stampeding Toward Protectionism

By George J. Church.

As Senator William Cohen views it, Congress wants "to practice the Golden Rule." By striving to cut imports from countries thought to discriminate against U.S. products, says the Maine Republican, "we intend to do unto others what they do unto us." To President Reagan, however, the anti-import rumblings are sounds not of piety but of recklessness, the beginning of "a mindless stampede toward . . . economic disaster," as he put it at his news conference last week.

A stampede of some kind, anyway. Lawmakers have introduced more than 200 bills that would restrict imports in one way or another, and the first is about to come up for action. It would slash U.S. imports of textiles and clothing by 25% to 40%; 346 Senators and Representatives of both parties have signed up as cosponsors. South Carolina Democrat Ernest Hollings, one of the drafters, will try this week to rush it to the floor of the Republican- controll ed Senate as a rider to an unrelated bill, with strong prospects of getting a vote. In the Democratic-controlled House, the trade subcommittee of Ways and Means last week approved the bill, and the full committee is expected this week to mark it up for floor action. The procedure, some staffers joke, should take about five minutes.

The question is less whether the bill will pass than whether it will do so by votes large enough to override an expected Reagan veto, and what sort of amendments may be attached. A number of the cosponsors have signed on less out of any consuming desire to save the U.S. textile industry than out of a desire to turn the bill into a vehicle for amendments that would restrict imports of shoes and all manner of other products. But should they fail in that effort or be frustrated by a Reagan veto that sticks, the anti-import forces will not lack for other bills that would enable them to renew the fight.

One measure was drafted by Ways and Means Committee Chairman Dan Rostenkowski of Illinois and two Democratic colleagues, Texas Senator Lloyd Bentsen and Missouri Congressman Richard Gephardt. It would require countries that are running especially large surpluses in trade with the U.S. to begin reducing them immediately or face a stiff penalty: a 25% tariff to be imposed on the value of all goods that they continued to sell in the U.S. In its present form, the bill would apply to four nations: Japan (of course), Taiwan, South Korea and Brazil. Thus it would raise sharply the prices American consumers would have to pay for products ranging from cars to coffee. Republicans in both House and Senate are concentrating on coming up with alternatives to this bill that would restrict imports less drastically but retain the principle of punishing countries thought to discriminate against American products.

To Ronald Reagan, all this is distressingly reminiscent of the Smoot-Hawley Act of 1930, which raised American tariffs high enough to start a world trade war that seriously deepened the Great Depression. "And I know, I lived through that period," the President recalled in a prepared statement opening his news conference last Tuesday. Foreign nations, he predicted, will react to any new curbs on their sales in the U.S., not by rushing to open their markets wider to American goods and services but by buying even less. Said Reagan: "Americans whose jobs depend upon exports of machinery, commercial aircraft, high-tech electronics and chemical products could well be the first targets of retaliation." He also raised the specter of retaliation against American farmers, who depend on foreigners to buy some 40% of their produce.

Clayton Yeutter, Reagan's special trade representative, elaborated on the point in an interview with TIME. Agriculture, he said, "is the easy" retaliatory target for foreigners "because it is a big chunk of our exports, and it is an area where (other nations) can easily shift suppliers. There are gigantic surpluses of agricultural production everywhere, so they don't have to worry about being able to get the product." Giving a preview of an argument the Administration is likely to use against the textile bill, Yeutter mused, "You can tell the proponents of that legislation, 'O.K., you just helped your textile workers, but you just put those soybean farmers down the road out of business.' "

The White House is well aware, however, that more than doomsday warnings will be required to defuse the protectionist offensive. Reagan's aides accordingly have drafted what amounts to an alternative trade program, which the President was scheduled to announce Monday morning in the East Room of the White House in a speech to a select audience of business executives involved in international trade. The program focuses on obtaining fairer treatment for American goods and services in world markets through Administrative action and negotiation, rather than by blunderbuss legislated restraints on imports. Some points: more presidential use of power granted under existing law to impose carefully targeted penalties against the goods of nations violating world-trade rules, more authority for Yeutter to prosecute such cases before international-trade policing groups, stepped-up efforts to arrange a new round of worldwide trade negotiations aimed at opening markets everywhere.

To many on Capitol Hill, all of this is likely to appear pretty weak. In their view, the nation is in a trade crisis that is beginning to damage the whole economy. According to a "flash" estimate by the Commerce Department released last week, output of goods and services grew at a rate of 2.8% in the third quarter. That was a bit better than the 1.9% for the previous three months but well short of the vigorous second-half rebound that the Administration had been hoping to see. For the year so far, growth is running about 2%, a rate that in the final analysis probably would be too slow to bring down unemployment. The ballooning U.S. trade deficit (excess of imports over exports), estimated at $150 billion this year, vs. $43 billion as recently as 1982, unquestionably is a major reason for this disappointingly slow growth. Some economists, not necessarily protectionists, figure that growth would be twice as fast if American producers were still supplying the same proportion of goods and services bought by both foreign and domestic consumers as they were a few years ago.

A great deal of the money paid out for imports, of course, is returned to the U.S. in the form of foreign loans and investments. But that is not entirely reassuring. Figures released by the Commerce Department last week indicated that sometime during the first half of this year, the U.S. crossed a historic line: for the first time since 1914 it became a debtor nation, with less loaned and invested abroad than foreigners have loaned and invested in the U.S., and from now on will be paying out more in interest and dividends than it gets back. The significance, for the moment at least, is more symbolic than real, but the development is a blow to national pride.

None of this means that the drive to restrict imports is justified. In the opinion of the great majority of professional economists, foreign discrimination against U.S. exports and subsidization of sales to the U.S. are a minor factor in the trade deficit. The real trouble is the overvaluation of the dollar, which makes exports artificially expensive and imports artificially cheap; it can be cured only by cuts in Government spending and perhaps tax increases sufficiently painful to bring down the towering budget deficits that indirectly pump up the dollar. Import curbs would at best be ineffective, at worst damaging. For one thing, they might work to revive inflation, by raising prices both of imports and of the American goods that compete against them.

That case for the moment impresses few in Congress, for reasons at least as much political as they are economic. By howling that unfair foreign competition is wiping out jobs and Reagan is doing nothing about it, many Democrats are convinced they have at last hit on an issue that could win back the votes of white Southerners specifically and blue-collar workers generally, in time to reap major gains in the 1986 congressional elections. More than a few Republicans fear the Democrats just might be right. In resisting the resulting pressure for protectionism, Reagan has economic logic on his side. But it will take all his persuasive powers, and quite possibly more than one veto, to make logic prevail.

With reporting by Sam Allis and Barrett Seaman/Washington