The Reagan administration's espousal this week of what it billed as a "free trade" policy (to the bitter complaint of protectionist-oriented U.S. industries such as steel and shoes) should not lull U.S. trading partners into a false sense of security.
The president and his team are preparing to demand strict reciprocity from America's principal trading partners at the Ottawa summit July 19-21. Moreover U.S. negotiators are likely to insist that something be done about "newer distortions" cropping up in trade in services and about Canada's nationalistic decisions relating to foreign investment.
"One of the most difficult challenges we must face in seeking to achieve free trade is to develop appropriate responses to the growing intervention of foreign governments in international trade," Ambassador William Brock, U.S. Trade Representative told Congress.
Specifically, the United States is continuing to press the government of Socialist President Francois Mitterrand to drop a policy of extremely generous export credit subsidies that were put in place by Valery Giscard d'Estaing and is demanding that Canada reverse some of its discriminatory rules on U.S. investment in Canada.
"We are going to put great pressure on our trading partners to reduce all barriers to our exports," adds one White House adviser.
But the Reagan administration has shown a great deal of ambivalence in developing a trade policy, especially in relation to imports. Against his inherent free-market instincts, Reagan had to deal with his campaign commitment to "do something" for the hard-pressed U.S. auto industry. That "something" eventually turned into "voluntary" quotas that will cut Japanese car shipments here this year by some 140,000 cars.
Acceptance of the Japanese quota threatened to tear the administration apart. It has been criticized as a quick fix -- one that didn't deal with fundamental problems, including excessively high wages or the industry's investment and modernization programs.
And when it came to evolving the formal trade "white paper" presented to Congress this past week by Brock, the most ardent of the administration's free-traders had to fight hard to change the proposed wording from advocacy of "free and fair trade" to simply "free trade" and to eliminate (in one early version) a flat commitment of relief if a domestic industry could show injury from imports.
Nonetheless, the white paper as released stands, basically, as a pro-competition document. But the tone -- in the mind of committed free-traders -- leaves something to be desired. Says one outside trade expert: "They [the Reagan administration] have a procompetition philospophy, but no strategy. They kind of say to U.S. industry, 'it's sink or swim, unless you have political clout.'"
By way of contrast, testimony by Council of Economic Advisers Chairman Murray L. Weidenbaum supporting the administration paper was a much more agressive endorsement of completely free trade, which welcomes high imports as well as high exports. "In fact," said Weidenbaum, "the only way in the long run to increase our exports is to increase our imports." Explaining "this rather provocative point," Weidenbaum went on to observe, as an example, that restrictive quotas on imports of foreign shoes caused U.S. exports of hides to suffer.
"The question is frequently asked," Weidenbaum testified, "'Other nations do not have a policy of freer trade, why should we?' But rather than ask if other countries practice 'free' trade, I would ask if their trade policies are more open today than they would be without the continued pressure of agreed international rules of the game -- rules often developed under the persistent and patient influence of the U.S. government. My answer is a resounding yes."
Weidenbaum's final point was that U.S. trade restrictions, whether put in effect for "retaliatory reasons or otherwise, runs the risk of setting us on a path leading back toward the 1930s." Weidenbaum's words succinctly expressed the fear of many, as the Ottawa economic summit nears, that the world is drifting into a "beggar-thy-neighbor" condition, in which open protectionism is the norm, rather than the exception.
The compromise Brock document is not that direct, presumably because it was produced by a committee representing as well the corporate-oriented sentiments prevailing at the Department of Commerce, Transportation, and Agriculture among others. In other words, it falls far short of its billing by Sen. John C. Danforth (R-Mo.) as a "survival-of-the-fittest" policy. Even now, according to some administration sources, limitations are being considered on imported tobacco and casein, as well as a modification of the Multi-Fiber Agreement that would reduce the textile quotas of some less developed countries.
On the other hand, the administration had the political courage to face down demands from the shoe industry that it continue quotas on imports from Korea and Taiwan. Many administration officials -- in the State and Treasury departments and the Council of Economic Advisers -- hope the shoe decision, rather than the Japanese auto decision, will prove to be the norm of Reagan policy.
Approaching the summit, some of Reagan's trade advisers fear there is a risk that the trading system will be pulled apart by the investment and services issues that until now have been shoved into the background by higher-profile arguments over autos and textiles. Assistant Secretary of State Robert Hormats observes that countries less competitive than the U.S. in data-processing "are very jealous of their markets and are reluctant to let us in."
Other countries are surprisingly dependent on U.S. data-processing. Hormats cited the example of the Malmo, Sweden, fire department which keeps all of its records at a U.S. data-processing firm in Cleveland: "Every time there's a fire, someone calls a number, [and] it goes over the satellite. Malmo tells them how many people live in the house and where the fire alarms are and everything. And you can begin to see how countries are a little worried. All this data is being done somewhere else far away."
Europeans tend to complain that America sets economic policy without due sensitivity to its impact on its partners. There is a certain amount of truth to this complaint, even though the U.S. now depends on exports for roughly 12 percent of its gross national product, or twice as much as in 1960 and four times the ratio in the 1940s.
For all the sloganeering about an interdependent world, the harsh fact is that every nation these days puts self-interest first. Hormats, who has devoted a career ranging over four administrations to supporting an open trading policy, made the point this way the other day:
"There is a growing feeling in this country that, somehow, the United States is an economy which is far more open than most of its trading partners . . . [which now] go along with a more parochial, more nationalistic approach to trade."
He cited three examples -- Canada, Japan and Western Europe. All of these countries sign open-trading, antiprotectionist declarations at summits, he said -- and then go home to do the opposite.
Europe "is beginning to lose some of its outward zeal," while complaining about Japanese protectionism. Only West Germany still exhibits a sense of "obligation" to an open trading system, while "most other countries [in Europe] -- not for malicious reasons, but simply because they're preoccupied with their domestic economies -- are less and less willing to stand up for a free-trading system," Hormats said.
While Europe seeks protection for some of its declining industries, Japan's protectionism works the other way -- toward its infant industries. Coincidentally, although Japan has opened its markets considerably in the past couple of years, it still finds effective ways of blocking totally free access to its own markets.
All of these issues will form an important backdrop for the Ottawa summit, although only the most general references are likely to creep into the communique. The seven summit leaders, after all, are members of a very exclusive club, in which there is supposed to be no finger-pointing. For the most part, the communique will deal with such unexceptionable statements that trade policy, to be successful, depends on each country achieving a sound domestic economy. But the Catch-22 is that a sound domestic economy depends on a sound trade policy, which in turn depends on enlightened leadership.