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Trade war.

Trade War

Paul Krugman of MIT, a former staff economist for President Reagan's Council of Economic Advisors, recently commented in The New York Times, "Last year, U.S. sugar prices got so far out of line with world prices that it would have been cheaper to extract sugar from Canadian pancake mix and Israeli frozen pizza than to produce it from domestic sugar cane.' Our sugar subsidy runs about $780 million per year. So much for America as a bastion of free trade.

We dump beef on Brazil and wheat on the Soviets. We pay a premium of perhaps $400 per car thanks to "voluntary' quotas foisted on the Japanese five years ago. Recent reports from auto industry analyst J.D. Power & Associates decisively demonstrate that the quality of most American cars has not improved during this so-called "breathing space.'

Textiles have been generously protected for two decades. Yes, the Chinese, with their low wages, are selling more textiles in the market today--$1.1 billion worth last year--but the larger and harsher reality is that the textile makers, too, have frittered away the relief granted.

And steel? Why even bother to discuss it? My short list of best-managed American firms does include steel companies: Worthington Industries of Columbus, Ohio; Nucor Corporation of Charlotte, North Carolina; and Chaparrel of Dallas, Texas. But they are the exceptions. U.S. Steel--now USX--used its protection-gained dollars to get out of the steel business.

We are not free traders, neither in agriculture nor in machine tools. We never have been. The political rhetoric says we are suckers, the only ones who play it straight. Baloney. When it comes to subsidies--from grain subsidies to SDI-financed software to our lingering and lonely rejection of the metric system--our deck is as stacked as the next guy's. Moreover, we continue to live in an isolationist fog, still caught in the idea of a limitless internal market. Our skills as exporters are highly questionable.

Sorting out all the facts is not easy. But if you can stomach it, there is a superb primer--Stephen Schlossstein's Trade War.* Schlossstein's assessment is not balanced. He tells the other side of the story: how the oft-cited "unlevel playing field' tilts as much in our direction as in the other fellow's; how we have caused most of our woes.

* Trade War. Stephen Schlossstein. Congden and Weed, $8.95.

Schlossstein, who lived in Japan for six years as a vice president of The Morgan Bank and now runs a financial consulting firm in Princeton, New Jersey, pulls no punches: "Why have our exports lagged so badly in comparison with other countries? Our politicians would have us believe it's not our fault. It's the Japanese who keep our products out of their markets by cunning Oriental devices known as non-tariff barriers, infant-industry protection, and product-certification standards . . . but the answer is not that simple. It's not only because we are not export minded, but because our productivity growth has been the most languid of any industrial country in the post-war era, our product quality has not kept pace with our competitors, our technological advances have slowed, our currency has behaved like a patient in intensive care . . .. We can scarcely compete any more in our own domestic market, let alone Japan's.'

From that cheery beginning, Schlossstein proceeds through an industry-by-industry analysis of our problems. The litany is now familiar, but he provides the facts. He traces Japan's ramble from a 0.2 percent auto market share in 1965 to a 21.3 percent share in 1980, just before quotas, and describes the aftermath of quotas, the inevitable process of "leveling up.' When limits are mandated, the sensible restricted party responds by filling the now artificially constrained slots with more expensive items. Thus, Honda, which, as a new kid on the block, drew a short straw from MITI, fills precious spaces once occupied by $6,000 Civics with a new $20,000 car--the Acura Legend, the engineering development of which was paid for by the American car consumers' artificially induced price premium. The skillful exporter also hunts for areas not covered by the quotas; Japan found mini-vans. This unrestricted "truck' arena soon became a style-conscious, upscale "car' arena. Some 1.4 million mini-vans will be sold in the United States this year, and Japan will capture a 30 percent share of the market--all beyond the quotas.

A saga as revealing as any is the little-known tale of how we lost the bicycle market. The Europeans took this one. Imports soared from one percent of the market in 1949 to 41 percent in 1955. Needless to say, the American Bicycle Manufacturers Association fought back--with vicious lobbying, not better bikes. After President Eisenhower lambasted them, they responded: "A bike is a bike, and they're all sold interchangeably in a single market. There is only one major difference between bikes made in America and those coming in from any foreign source. That single difference is price [their emphasis].'

Council on Foreign Relations Economist Percy Bidwell responded: "Common observation throws considerable doubt on the accuracy of this statement. Practically every American boy or girl above the age of ten knows the difference between an English bicycle--a light machine weighing 30 to 35 pounds, with clean lines not obscured by gadgets and accessories--and the balloon-tire models which make up the bulk of the product of the American factories.'

Schlossstein concludes: "Of course, bigger is better, we all know that. If the customer isn't buying our product, we'll dress it up. Nobody really wants those sissy foreign bikes with their skinny wheels. The only reason Americans are buying them is because they're cheap. Stick with the fat tires. They're USA all the way. Downsize? Forget it.' We see in this vignette, without all the psychological baggage accompanying the Japanese challenge, the main themes of our decline in market after market.

Schlossstein also dissects the numbers lobbysis commonly use to argue for protectionism. We're running a $60 billion negative trade balance with Japan right now. Or are we? The ballyhooed balance is in merchandise trade alone. Our sizable service sector surplus isn't counted. Our royalty income isn't tallied: "The United States accounts for 50 percent of all technological agreements with Japanese companies . . .. Total annual remittances from Japan to the United States are equivalent to some $35 billion in sales to the Japanese market.' As a further complication, U.S. subsidiaries do at least $50 billion a year in business in Japan, which likewise doesn't get added in. This doesn't mean we can stop worrying about our declining manufacturing sector. It does mean we should stop letting scary numbers lead us to support stupid policies.

Schlossstein provides a wealth of other disarming statistics. Our overall tariff in the seventies ran 11 percent, versus 10 percent for the Europeans and 9 percent for the Japanese. We have six nonagricultural quotas; Japan has five.

The indirect stumbling blocks to trade are at least as important as the direct ones. The author does a workmanlike job of assessing the many forms of non-tariff barriers: including domestic subsidies (tax cuts, R & D, special depreciation), restrictive customs procedures, restrictive technical standards, export subsidies, antidumping regulations, controls over foreign investment, and discriminatory foreign exchange rates. Once again, the clear-cut conclusion is that no one's hands are clean.

Our tax system, pre- or post-Packwood /Rostenkowski, is hardly neutral. Its selective manufacturing and R & D subsidies run about $100 billion per year. Look inside the tax system to figure out who's got an advantage and you go nuts.

And then there is our over-energized, over-sized, highly contentious lawyer population, which holds out the threat, on the flimsiest of evidence, of massive suits (for dumping, for instance). No other society so regularly resorts to such effective stalling tactics. At the very least, such actions cast a pall over future business contracts.

Schlossstein next takes on, with particular testiness, the issue of our determination as exporters: "Most Americans don't or can't or won't learn the Japanese language. Japan sends its commercial missionaries all over the world to spread the good word about the superiority of Japanese goods, and they do it in the local language . . .. Plus, Americans simply aren't patient when selling in the Japanese market . . .. Our short-term orientation doesn't help us much when the Japanese are geared to look at market development efforts in terms of decades.'

To top it off, the Japanese are uniquely quality-conscious consumers. Schlossstein reports the findings of a U.S.-Japan Trade Study Group: "The Japanese have become the most demanding consumers in the world . . .. And still, Americans sell big cars with wrong side drive, equipment not measured to the metric system, appliances not adapted to lower voltage and frequency requirements, office equipment without kanji capabilities, clothes not cut to fill the smaller Japanese body, hamburger meat that isn't fatty, and catsup that doesn't run.'

Does Schlossstein overstate? Yes, in some fashion. He tells mostly one side of the story. However, it is the side which has been largely untold; our politicians and Fortune 500 chieftains have browbeaten us with the other half.

The author is as mellow in prescription as he is pointed in analysis. He urges us to gather the facts on our competitive strengths and weaknesses (our data collection is directed at aggregate economic analysis, whereas Japan's focuses on industry-by-industry competitive positions), and then bring the true story, in gruesome detail, to the public's attention.

Schlossstein's jawboning would take place via a relatively innocuous vehicle he calls an Industrial Policy Commission. Though sounding like the recent Young Commission on Industrial Competitiveness, it differs in that it would stick around, becoming, after an initial report, a permanent Industrial Policy Council.

Schlossstein then all too hastily dances through the policies his council might consider: "What tax incentives would be necessary to stimulate production and curb consumption; what priorities should be set for government procurement; what role special depreciation should play, and for what industries. How should our research and development efforts be strengthened and funded; what curriculum changes in the American educational system are necessary, and how should they be funded . . .?' And so on.

While Schlossstein's book is not flawless, it is, surprisingly, the only recent readable examination of this critical issue.
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Author:Peters, Thomas J.
Publication:Washington Monthly
Article Type:Book Review
Date:Oct 1, 1986
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