Can we open foreign markets by closing our own? One of the hottest ideas in Washington is that we should retaliate against protectionist countries by raising our own import barriers against them. We will remove our restrictions only when they remove theirs, the theory goes, forcing these countries to negotiate with us to eliminate all trade barriers. “Retaliation” is the rallying cry of a new economic nationalism that has gained support from powerful Republicans and Democrats alike. But it doesn’t work.
So far, the most important result of all this talk of retaliation is the so- called Super 301 law. Passed as part of the 1988 trade package, this measure amends Section 301 of the trade code, expanding the power of the U.S. trade representative to crack down on countries with “unfair” trading practices by erecting barriers to those countries’ goods. When Super 301 was passed, House Ways and Means Committee Chainman Dan Rostenkowski (D-Ill.) proclaimed, “This is a positive step toward dismantling foreign trade barriers that adversely affect American interests.”
And last year, President Bush declared he would “work vigorously to break down trade barriers abroad.” He gave the new U.S. trade representative, Carla Hills, a crowbar at her swearing-in ceremony, suggesting that trade retaliation is a crowbar to force open foreign markets. Underlying all this is what we might call the “crowbar theory” of trade sanctions. In his 198 1 study, Economic Sanctions, Robin Renwick, of Harvard’s Center for International Affairs, expressed it this way: “The theory of sanctions rests on the assumption that if subjected to economic penalties a nation will, as a matter of self-interest, change its conduct.” But it’s hard to find any significant cases where the theory has worked. The United States has closed its market many times, and almost always foreign markets have just closed even tighter.
During the 1980s, the portion of U.S. trade subject to import restrictions increased about 50 percent. We closed our market mainly with import quotas, “voluntary” agreements with other countries to reduce their exports, antidumping duties, and retaliatory tariffs.
Yet other countries didn’t respond by opening trade to outsiders. The Europeans, for example, merely counter-retaliated with punitive tariffs, “voluntary” restraint agreements with the United States, antidumping duties, and local-content laws. Arid if you look at particular American retaliatory actions, the record is dismal. Since 1974, when Section 301 first became law, the United States has brought 78 cases against foreign governments. Threats of American retaliation have forced only 13 market openings-and those were generally trivial.
In 1975, for example, the American Farm Bureau complained that Canadian egg import quotas were harming American producers. After lengthy talks with the U.S. trade representative, the Canadians agreed to increase their quota limits. In the world of Section 30 1, that was designated a market opening. And consider the following actions, not one of which led the target country to lower its trade barriers:
In 1982, President Reagan imposed retaliatory tariffs against Argentine leather. In 1987, he ordered 100-percent retaliatory tariffs against Japanese laptop computers, power tools, and other products, because of a dispute involving Japanese semiconductors. In 1988, after the trade representative was unable to resolve a dispute about pharmaceutical patent protection in Brazil, Reagan ordered 100-percent retaliatory tariffs against Brazilian paper products, pharmaceuticals, and consumer electronics.
Despite their utter lack of success, all of these retaliatory tariffs are still in force. Some U.S. manufacturers may benefit-but by charging American consumers more, not by gaining “fair” access to new markets over- seas. The most significant “victory” for the crowbar theory was the opening of the Japanese cigarette market three years ago. But although cigarette exports to Japan have increased substantially, they still account for less than 2 percent of total exports to Japan. And overall American exports to Japan jumped 40 percent over the same period-largely because lower exchange rates and higher quality made American products more competitive. Retaliatory threats had nothing to do with these big changes.
Over the years, many American companies have actually been harmed by Section 301 actions. In 1978, for example, American broadcasters filed a complaint because Canada had abolished tax deductions for advertising on stations in the United States. The United States retaliated by removing tax deductions for advertising on Canadian-owned stations. The consequence, of course, was that American advertisers had a harder time reaching the Canadian market. Twelve years later, these retaliatory measures are still in place-and Canada has not changed its original policy.
In 1982, after failing to resolve a dispute about European steel subsidies, Reagan ordered .higher tariffs on imported European steel-making it more difficult for American automakers and appliance manufacturers to get competitively priced supplies. Georgetown University economist Gary Hufbauer argues that steel quotas cost Americans $1.5 billion to $3 billion in 1988. Similarly, the U.S.-engineered 1986 semiconductor agreement led to shortages of memory chips and a quadrupling of chip prices, harming American computer companies and consumers.
Last May, the trade representative targeted a number of Japanese electronics products for retaliatory tariffs, because of complaints that Motorola made about Japanese import limits on cellular telephones. In response, U.S. communications companies noted that they and their customers-not Japan-would be the ones to suffer if electronics equipment were slapped with new import restrictions. “We are seriously concerned,” said Edwin B. Spevack, president of the North American Telecommunications Association, “about the propriety of imposing sanctions so broadly when the problem concerns so narrow a segment of the entire industry. Not only do we believe that such measures are inappropriate, we also know their imposition would be counter-productive .... it mandates that the American consumer and American businesses-many of them small businesses-will be forced to bear penalties greater than those Japan may experience.”
But while some companies complain about retaliatory trade barriers, others are learning to use the process for their own benefit. Last year, the trade representative began an investigation into complaints that Brazil allows its computer manufacturers to pirate American software. Alert to an opportunity, U.S. footwear manufacturers and ferro-alloy metal producers stepped forward to urge that their Brazilian competitors would be ideal targets for retaliatory tariffs if action were taken against Brazil.
If the trade representative does slap tariffs on Brazilian shoes and metal, that probably won’t stop the alleged pirating of software. But U.S. shoe factories and metal makers will have a little less competition to worry about. And, of course, consumers will pay more for shoes, while manufacturers that use ferro-alloys will get socked with higher costs.
Far from opening markets, retaliation tends to provoke nationalism and xenophobia, generating even more pressure to keep out American goods. This rising nationalism-notable today in South Korea and Japan-is undoubtedly driven at least as much by resistance to free trade as by resentment of US. trade barriers. But, either way, the crowbar will prove ineffective if not counterproductive.
South Korea began its first vigorous antismoking campaign, for instance, after the United States pressured it to eliminate barriers to American cigarettes. Anti-American Korean leaders promote greater self-sufficiency and oppose letting in more imports. Their rallying cry is Minjok chajo: “We can do it alone.” Similar sentiments are on the upswing in Japan. Facing the threat of U.S. retaliation, those (such as South Korean and Japanese farmers) who oppose lowering trade barriers simply on self-interested grounds, can gain allies by appealing to patriotism.