Three Industries That Want Help

U.S. industries buffeted by foreign competition, like wounded soldiers in a field hospital, can be roughly classified on the basis of triage: those that must be attended to promptly if they are to survive and those that will live or die regardless. The treatment most often called for by the victims of trading wars is protectionism. But as these examples make clear, unfair foreign practices are not always the real cause of distress, and trade barriers, while providing short-term relief, may in the long run be counterproductive.

Stung by cheap labor

abroad, the U.S.

shoe industry seems

beyond saving

"The shoe industry is doomed," says Seymour Fabric, president of the Southern California Shoe Manufacturers Association. "It's heartbreaking." In Maine, eight shoe factories have closed in the past 18 months, with a loss of about 7,600 jobs. In neighboring New Hampshire, shoemakers employed almost 11,000 workers a decade ago; this year fewer than 7,000 are at work.

Under a provision of the trade laws that allows industries facing extinction to apply for relief from foreign competition, the U.S. International Trade Commission recommended last June that the Administration cut the foreigners' share of the U.S. shoe market from 71% to 68%. President Reagan's refusal to do so was backed with coolly blunt reasoning: "To save a few temporary jobs, we would be throwing many other Americans out of work, costing consumers billions of dollars, further weakening the shoe industry and seriously damaging relations with our trading partners."

The U.S. shoe industry is not the victim of unfair trade practices but of labor costs. Making shoes is a labor-intensive business, and the simple fact is that foreign workers are willing to work for less. In the U.S., the typical shoemaker earns $6.71 an hour. In Brazil, the average hourly rate is 85 cents, in Taiwan, 91 cents .

Some high-price, high-quality American shoes have carved out foreign markets. In Italy, Timberland shoes (retail price in Rome: $100 a pair) are such a fad that young thugs have taken to attacking people and stripping them of the American-made footwear. Yet the Timberland factory in Newmarket, N.H., failed to meet its production target last year because it could not pay its workers high enough wages.

According to the ITC, prices of imported footwear could rise by some 15% in the U.S. in the first year alone. To employ 22,000 new shoeworkers at an average salary of $14,000 would cost the U.S. $26,300 per job. Shoe quotas would hurt developing countries, which are struggling to earn foreign exchange to service their U.S. debts. Washington would be in the awkward position of demanding that Brazil meet its debt obligations while depriving it of the means to do so.

The benefit to the shoe industry might amount to little more than a stay of execution. After five years of protection, there is no reason to believe that the American shoemakers would be any more able to fend off foreign competition. Says U.S. Trade Representative Clayton Yeutter: "That was the major strike that the footwear industry had against it. If the industry could have demonstrated that it was likely to be price competitive in the future, we may have had a different position."

By refusing to bail out U.S. shoemakers, Reagan further stirred protectionist passions in Congress. The shoe industry has some powerful allies, including Senate Commerce Committee Chairman John Danforth of Missouri (home of Buster Brown shoes). Of the four-member New Hampshire delegation, only one, Senator Gordon Humphrey, supported the President. "I don't represent shoeworkers only," declared Humphrey. "I represent consumers." Humphrey is not running for re-election next year.

Still, it is likely that Reagan correctly gauged the political odds on shoes. Though determined, the defenders of the shoe industry are not numerous enough to carry Congress. That is, unless they can make common cause with Congressmen fronting for some other--and more powerful--endangered industry, such as steel, textiles or autos.

The U.S. tries to

buy time to allow

once mighty steel

to compete again

In its halcyon year of 1973, the U.S. steel industry rolled out 151 million tons of raw steel, employed 509,000 workers and captured 87.6% of the domestic market. By the end of last year, the industry had shed 26 million tons of capacity and 296,000 jobs; its share of the domestic market had dropped to 68.8%.

With the 1984 election looming and steelmakers screaming for relief, the Reagan Administration required foreign competitors to enter into "voluntary restraint agreements" aimed at reducing their share of the U.S. market to mid-'70s levels for a period of five years. Nonetheless, many experts doubt that foreign competition was the cause of the steel industry's woes or that protectionism is the cure.

Wishful thinking is partly to blame for Big Steel's hard times. In the mid-'70s, when mills were running at full capacity and it seemed the boom would never end, industry executives predicted that they would need 185 million tons of raw-steel capacity by 1983. In order to buy industrial peace, management agreed to extravagant labor contracts.

But after a decade of slower-than-expected economic growth, the steel industry was saddled with far too much capacity and mountainous losses. The downsizing of American-made autos was partly responsible, as was the beverage industry's shift from steel to aluminum cans. American steelmakers, meanwhile, were slow to reinvest in new equipment.

Only belatedly did U.S. producers try to modernize and become more efficient. Man hours per ton of carbon steel produced by large mills fell from 7.8 in 1978 to 5.4 in the second quarter of this year. So far, however, the Administration's effort to buy the industry some breathing space with voluntary quotas on imports has not produced results. Even if shipments from the major exporters can be slowed, the industry fears smaller producers will step in to take up the slack. So far, only one-third of the 76 steel-producing nations have agreed to limit their exports, and some agreements have loopholes. Korea and Japan, for instance, refused to include certain steel components for offshore oil rigs in their import quotas.

In the future, experts predict, the steel companies will have to compete for a dwindling world market. Still, a trimmed-down U.S. steel industry should be able to carve out a niche as well as produce enough steel to meet national security needs at home. Says Howard Wilkinson, director of corporate affairs for the California Steel Industries, Inc., a year-old steel rolling mill with 700 employees: "There will be more casualties yet, but on the whole the industry will come out more streamlined." He adds, "At least it's a fair fight, and if you can't win you shouldn't be in the game." If the game is to be worth playing, the world economy must continue to grow and sustain the demand for steel. Protectionism, many experts agree, would stunt such growth by retarding trade and might wind up hurting the industry in the end.

Silicon Valley pleads

for protection, but

that is the wrong Y for

high tech

High tech is the present and future of American manufacturing, accounting for 43% of exports last year. The U.S. is the world's leading exporter in six of ten high-tech categories.* But there is growing concern that foreign competition, some of it unfair, threatens to undercut the American edge. The U.S. trade surplus in high tech has already dropped from $26.6 billion in 1980 to just $6.2 billion last year.

The biggest foreign threat comes from the Japanese. The U.S. high-tech trade deficit in electronics with Japan stood at $15 billion last year, and it could exceed $20 billion this year. Hardest hit is the semiconductor industry, the manufacturers of wafer-thin microchips that store a computer's memory and carry out the commands of its software. Japanese semiconductor exports to the U.S. last year were almost $2 billion, compared with only $251 million worth flowing from the U.S. to Japan. Unless something is done to reverse the tide, warns Warren Davis, spokesman for the Semiconductor Industry Association, the U.S. "will not have a semiconductor industry in two to three years."

U.S. microchip manufacturers blame unfair trade practices by the Japanese. They claim that if Japan dropped its barriers and stopped dumping, the U.S. would, at a minimum, double its 12% share of the Japanese semiconductor market. The industry cites as "the smoking gun" a memo uncovered from Hitachi, Ltd. to its U.S. distributors instructing them to undercut semiconductor prices by 10%, while guaranteeing them a 25% profit.

Asserting that the Japanese have turned their backs on an informal 1984 trade agreement that would have given better treatment to American companies, the U.S. semiconductor industry has brought an unfair-trade-practices action against Japan. In July the U.S. trade representative began an investigation of the charges.

Microchip makers say that they are hoping to use the threat of protectionism as a lever to win a negotiated truce that would open up Japanese markets without closing U.S. ones. There are some signs that Japan is eager to give at least the appearance of loosening up. The powerful Ministry of International Trade and Industry last spring announced its intention to drop tariffs on some high-tech products, though the Japanese could of course deploy any number of other protectionist measures to block U.S. goods.

In one very important respect, the slipping balance of trade statistics are not only deceptive but a measure of

American high-tech strength. Many U.S. companies manufacture products overseas. If they ship them back to the U.S., these products are counted as imports. What appears to be sales lost to the U.S. are really just the opposite. The U.S. share of the world computer and business-equipment market, for example, continues to grow, from 63% in 1970 to an estimated 71% this year. In addition, many U.S. companies import cheap components, often from cut-rate producers like Hong Kong or Singapore, and then sell finished products around the world. Import restrictions would thus drive up the cost of many U.S. exports. "We don't have to be at the leading edge of every technology," says Vico Henriques, president of the Computer and Business Equipment Manufacturers Association. "We will simply take advantage of what exists and blend it together and produce the best systems, the best software and the best end product."

Even the semiconductor industry recognizes that threatening the Japanese with protectionism risks provoking retaliation. With one-third of its sales abroad, as well as 75 plants in the Far East and a dozen in Europe, the U.S. microchip business is just as dependent on free trade as the rest of America's far-flung high-tech empire. It can ill afford, acknowledges Industry Spokesman Davis, to "revert to Fortress America."

For high-tech manufacturers, protectionism poses a threat that transcends imports and exports. "It would destroy U.S. high tech," predicts Arthur Alexander, a Rand Corp. economist who specializes in high tech. "What drives that industry is competition and innovativeness, both of which would dry up if foreign markets closed."

FOOTNOTE: *The six: aircraft; office, computing and accounting machines; engines, turbines and parts; industrial inorganic chemicals; ordnance; guided missiles and spacecraft. The four in which the U.S. trails: communications equipment and electronic components; drugs and medicines; professional and scientific instruments; plastics, synthetic resins, rubber and fibers.