Protectionist Paranoia

Reagan and the Democrats either don't understand free trade or have started believing their own pap.

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President Reagan told a cheering campaign rally on October 20 that his Administration would provide $1.5 billion in credit subsidies to spur food exports. The next day he told another cheering crowd that his Administration had negotiated a "voluntary" quota on European steel entering this country, necessitated by the nefarious foreign practice of subsidizing steel exports. By "voluntarily" agreeing to this quota, the Europeans avoided a steel tariff that Reagan's Administration was planning to impose at 5 p.m. that very day. Reagan much prefers voluntary agreements because he is a free trader.

WaIter Mondale also believes in free trade. On the other hand, "I'm not a sucker," he says. Mondale doesn't want American kids to spend their lives "sweeping up around Japanese computers and . . . serving McDonald's hamburgers." The solution, he's been telling union conventions, is to "get tough, and I mean really tough -- with nations that use our markets but deny us their markets." Sen. Edward Kennedy (D-Mass.) agrees. "We must insist that other nations stop dumping their products at subsidized prices and driving American companies out of business." And Sen. Donald Riegle (D-Mich.), who has asserted that "this ruthless trade invasion by the Japanese" will lead to "a permanent lowering of the U.S. standard of living," revealed in the official Democratic reply to Reagan's October economic address that "Democrats want fair trade" in order to "put millions of people back to work."

This "ruthless" "using" of American markets, this "dumping," this "invasion" -- what does it consist of? It consists of selling us products we wish to buy at prices we wish to pay. Quotas, tariffs, and other trade barriers amount to denying us what we wish to buy, or making us pay more for it. Keep that in mind. Mondale talks, and Reagan acts, as if "free trade" were some beautiful ideal, like "peace" -- something to endorse and pray for, but nothing of any practical value, nothing worth counting on in the world of sinners. That is why Reagan thinks "voluntary" trade restraints are better than imposed restraints, even though they have exactly the same effect. And that is why the Democratic Presidential contenders want to respond to foreign trade restraints by imposing restraints of our own, even though such restraints are at least as costly to us as they are to the nations they are directed at.

In fact, imports are a minor cause of American unemployment compared with the recession, which is worldwide (including Japan). In the automobile industry, for example, imports increased their market share 110% since 1978, which is bad, but total car sales of any sort have dropped by a third, which is worse And even where foreigners have made inroads into our markets or kept us out of their own, more often than not the reason is an undeniable trade advantage -- such as cheaper labor, or a fair-and-square superior marketing job. Very few American workers have lost their jobs because of unfair foreign trade practices, and it is demagogic for Mondale and company to suggest otherwise.

The way to justify protectionism in the name of free trade is to say that all you are really after is "reciprocity." Thirty senators have co-sponsored a bill to achieve this ideal, the "Reciprocal Trade and Investment Act." They include Democratic Presidential contenders John Glenn (D-Ohio), Gary Hart (D-Colo.), and Ernest Hollings (D-S.C.). "Reciprocity" means you are imposing your trade restriction only as a way to get the other guy to drop his.

Free trade is not well understood. As Adam Smith and David Ricardo explained two hundred years ago, the point of free trade is that all nations will be better off if each one specializes in producing goods where it has a "comparative advantage." It is not trade restrictions that are keeping the Japanese from buying large numbers of American cars. They don't want our cars. But there is no reason to despair. They will buy something else from us; that is the only thing those dollars they have been accumulating are good for (or if they don't, we've got the Sonys and Toyotas for free). Mondale told the United Auto Workers that the Japanese really want to buy American baseball bats, but are being prevented from doing so by their government Could be. So should we restrict imports of their cars until they let in our baseball bats, in the name of "reciprocity"? The auto workers like this idea. But will they be prepared to relent on autos when the Japanese relent on baseball bats? As a political issue, "reciprocity" is a fake because the industries harmed by foreign countries' restrictions are not the ones that benefit from -- and lobby for -- our "reciprocal" restrictions. Let's face it, auto workers could care less about baseball bats.

The major piece of protectionist legislation before Congress makes no pretense of being temporary or reciprocal. This is the "domestic content" bill that would require any auto maker selling cars in the United States to produce a certain percentage of them here -- up to 90% of those selling over 500,000 units a year. Mondale said recently of domestic content legislation, "That's not free trade. That's not fair trade. That's not international competition. That is politics and protectionism . . ." He was speaking, however, of domestic content laws in other countries. He presumably supports the American bill, not being "a sucker." Senators Kennedy, Glenn, Hollings, and Alan Cranston (D-Calif.) are all cosponsors.

In introducing the domestic content bill, Sen. Wendell Ford (D-Ky.) explained, "It is only fair that foreign automobile companies create auto production and jobs in the United States since they enjoy a high volume of sales in this country." This piece of reasoning, of course, like Kennedy's remark, repudiates the very idea of trade between nations. If sales in a foreign nation impose an obligation to create jobs there, in the same industry, American farmers had better prepare to plant wheat in Russia, and so forth.

The fear of losing jobs to foreign trade is like the fear of losing jobs to technological advance -- and the protectionists, like the Luddites, have always been proved wrong. Both kinds of progress can cause tremendous dislocations, even tragedy, in particular industries, and it is surely a duty for the society that benefits generally to help ease the burden. But increased free trade, like technological progress, leads to a more efficient economy that benefits the whole society, and creates more jobs than it destroys. The political problem is that the cost of free trade is concentrated on identifiable groups that lose their jobs or suffer lower pay, whereas the cost of protectionism, aIthough larger, is diffused and hidden -- in higher prices for protected goods and new jobs that never materialize. That is why demagogy on this issue is so tempting.

"During the last 20 years," Mondale said in yet another recent speech, "Germany's share of world trade increased by more than a third, Japan's share more than doubled. And meanwhile, America's share declined . . . This is a disturbing trend." No it isn't. World trade is not a game. Other countries' prosperity is not bad for us. It is good for us. It means they can supply us with products better or cheaper than we can produce ourselves, and they can buy products that we make for them. Naturally as world trade grows America's share of it declines. In absolute terms, and as a share of our own gross national product, American foreign trade has grown enormously. That is why alarm about the share of imports in any particular industry is also misplaced. As foreign trade increases, foreigners increase their share of individual American markets, just as American products increase their share of markets -- usually different markets -- abroad.

We have been slower and dumber than other industrial nations about seizing foreign sales opportunities, and our trade balance shows it. Thus the call for an "industrial policy" to guide American capitalism in the new world market that is now boilerplate among Democratic Presidential contenders. Kennedy wants it. Mondale wants it. Glenn and Hart want it. Ernest Hollings even calls the front group for his quixotic Presidential bid "The Committee for a Competitive America." Mondale calls his "The Committee for the Future of America," which sounds very forward-looking. Yet the first concrete industrial policy to capture the fancy of all these gentlemen is about as backward-looking and uncompetitive as you can get: old-fashioned protectionism.

At a time of worldwide recession, trade barrier one-upmanship is especially dangerous. The collapse of world trade half a century ago, as nations tried to protect their home markets, helped lead to a self-feeding contraction of the world economy that produced the Great Depression President Reagan may be intent on living out the Hoover analogy, but the Democrats ought to know better.