All of Washington is now hell-bent on protectionism. The ill consequences are sure to be profound and painful.
Congress has threatened to pass tough trade legislation almost since President Reagan took office. "Mr. Free Trade" has responded with an escalating barrage of his own protectionist measures. At each turn, Reagan winks at dismayed free-market champions and whispers that he is only throwing a bone to keep a yelping Congress at bay.
As strategies go, this is a poor one. Congress caught on pretty quickly that barking and braying about the evil of imports works. With Reagan's move against Japanese semiconductors last summer, followed up with a 100 percent tariff on some Japanese electronic products in March, protectionists in Congress smell victory and are moving in for the kill. In late April, in a week dominated by see-who-can-be-tougher-on-trade talk in Washington, the House passed legislation with an amendment by Rep. Richard Gephardt (D–Mo.) that would require the president to slap tariffs and import quotas on any country running a large trade surplus with the United States (read: Japan). The Senate was to submit its own "tough" bill in short order.
And the size of the protectionist pack is growing. Without Reagan's leadership, long-time Republican free-traders are defecting. Said Rep. Bill Frenzel (Minn.), explaining why he helped the Democrats get a trade bill before the House: "I've changed. Free-traders are getting run out of town." Now, Frenzel is positively panting for an antitrade bill, fretting that inclusion of the Gephardt amendment might doom trade "reform" in this session of Congress.
With an eye on the much-feared trade deficit, the new watchword of the protectionists is "fair trade," or as Reagan said to Japanese Prime Minister Nakasone when he visited Washington, trade "flowing equitably between our peoples." Was trade, then, unfair and inequitable when the United States was running a trade surplus?
The fact is that international trade accounts, long downplayed by economists, are increasingly irrelevant and even deceptive in today's global economy. Consider last year's $58-billion U.S.-Japan trade deficit, which is supposed to show how much more of their stuff we bought than they bought of ours. But goods made by Japan based affiliates of U.S. companies are counted in a strange way: if the goods are shipped here, they're lumped in with Japanese exports, and if they're sold to Japanese they don't count at all.
This may not seem very important, but in fact U.S. firms that have been successful at cracking Japan's market have tended to do it from within. By 1985, U.S. companies produced and sold in Japan goods worth more than the entire U.S. "trade deficit" with that country—$53.1 billion versus $49.7 billion. Why are we even looking at the balance of trade?
America's trade deficit with Japan is about the same percentage of its total trade deficit as it was in 1980. True, the total deficit went from $39.1 billion in 1981 to $166 billion last year. But the U.S. economy grew 43 percent faster than West Germany's or Japan's from 1982 to 1986. Nor was all this growth in the "low-level service sector"—manufacturing output was up by 30 percent. And the number of jobs climbed from 101.2 million to 111.3 million. The trade deficit hardly seems to be a sign of economic weakness.
Even if the deficit did matter, there is wide agreement that very little of it can be attributed to our trading partners' barriers against U.S. imports—the supposed source of the problem and the reason for threatening tariffs and quotas of our own. Estimates of how much would be lopped off the U.S.-Japan deficit if Japan were to drop all its trade barriers range from a low of $6 billion to a high of $15 billion—at best, 25 percent of the current imbalance. In contrast, it's been estimated that we could cut 50 percent by eliminating just two of our own export controls, on Alaskan oil and national-forest timber. So much for scapegoating Japan.
The worst part of the protectionist frenzy that has seized Washington is that retaliation against trade practices that we perceive to be unfair is self-destructive. Japan does use tariff and nontariff barriers to protect some domestic industries against foreign competition. But should we shoot ourselves in the foot to fight it?
Should we force consumers to pay more for Japanese products they obviously want? That's what we do with tariffs and quotas already in place—to the tune of $55 billion in 1985. Should we protect some industries (such as semiconductors) at the expense of others (such as computers)? That's what last year's price-fixing semiconductor accord does—memory chips account for about one-third the cost of making a personal computer. Should we risk a trade war, jeopardizing the thriving trade we already do have with the Japanese? Last year the Japanese spent $27 billion on goods made in America, including $5 billion on agricultural products.
The consequences of protectionist retaliation don't sound very fair at all. Free trade is fair trade. It's fair to consumers, it doesn't single out some of our workers and businesses for special treatment, and it plays honest with our trading partners, who, after all, don't owe us anything. Trying to coerce them in the name of "fairness" is unfair—and unfree. We shouldn't stamp protectionism "made in America."