IS IT POSSIBLE that an administration that came to Washington committed to drastically reducing the role of government will leave as the creator of a bold new alliance between government and business? We had better hope so, for it now seems likely that only such a compact -- call it "America, Inc.," if you will -- will have the muscle to carry out a serious, long-term plan to restore the competitiveness of U.S. industry.
Few Americans yet understand how threatening our economic crisis really is, perhaps because there has never been one quite like it. We have just had a strong economic recovery. But the more we recovered, the more goods we imported from abroad and the more we undermined the competitive position of key U.S. industries in the world economy.
In order simultaneously to finance a growing budget deficit and satisfy the pent-up needs of business expansion, the U.S. government and American companies have been obliged to use funds from abroad. As foreigners traded in their own currencies for dollars in order to buy Treasury notes, U.S. stocks and CDs paying high interest, the value of our currency rose. As it did so, U.S. products priced in dollars became relatively more expensive on the world market.
And so, this country began losing out to foreigners in the competition for customers at home and abroad. Our trade deficit will reach a staggering $150 billion next year. The impact of foreign competition on American employment and output can be seen from the iron ore mines of Minnesota's Mesabi Range to the textile mills of the Southeast. Too many dollars spent by U.S. consumers are stimulating jobs in Asia, rather than Alabama. Troubled U.S. manufacturers are shutting U.S. plants or shifting production abroad, as cheap imports clobber U.S. companies.
The only logical response to this situation now is a combination of policies that has solid support from both government and business -- and one that draws on the experience and expertise of both. Realistically, this may be the time to heed the advice of Wall Street, the Senate Finance Committee and the Commerce Department, rather than the rhetoric of "supply-side" economists and conservative populists.
It goes without saying that the first step to make American industry more competitive is to get our own house in order. This means reducing the deficit.
If we do that, there will be less competition for funds, interest rates will fall, foreigners will stop converting their own currencies into dollars in order to take advantage of our near-record real (inflation-adjusted) interest rates, and the dollar's value relative to other currencies will begin to come down.
A single example -- that of Ingersoll- Rand Co. -- illustrates the damage the high dollar is doing to firms that until recently had been successfully competing in the sale of heavy construction equipment. Ingersoll- Rand makes compressors. The company recently compared the price of identical products made in its efficient U. S. plants and less efficient British and Italian plants. Because of currency misalignments, a British- made rotary compressor sold for drastically less than an American one. Those made in Italy were similarly cheaper.
But even if the value of the dollar came down there would be many other factors hurting the ability of our firms to compete. We need to assert our national self-interest. The government must play a more active role in promoting U.S. exports -- running interference for companies that are blocked from selling their products in other countries, matching the subsidies that other nations routinely give to their export industries, cutting away regulatory red tape and getting tough with other governments that steal our patents and ideas.
We can use existing or strengthened U.S. trade, copyright and patent laws, as well as new rounds of international negotiations, to try to crack down on Asian technology pirates, subsidized foreign steel and chemical manufacturers, and whole countries (such as Japan) that make it difficult for U.S. products to compete for customers in certain fenced- off home markets.
There are some signs that the Reagan administration has begun to see the advantages of such a strategy.
The Senate Republican Task Force on Industrial Competitiveness and the House Republican High Technology Task Force have both drafted "competitiveness agendas." The president has renewed his commitment to establishing a Department of International Trade and Industry, and, in January, his Commission on Industrial Competitiveness will issue recommendations.
They are expected to include proposals for streamlining trade laws, reforming antitrust laws and creating a Department of Science and Technology. Meanwhile, the President's Task Force on International Private Enterprise has just issued a report calling for the U.S. Export-Import Bank to expand its government loans to foreign customers in order to counteract the subsidies granted to overseas competitors.
Earlier this month, U.S. Trade Representative William Brock said that the United States would take punitive action against countries that refuse to open their markets to the United States, when negotiation fails to resolve the problem.
U.S. foreign aid has begun to be used to promote American exports, as in the just-announced decision to use aid payments to reduce the interest rate that Botswana will pay on a U.S. loan to buy General Electric locomotives.
In cases such as this, we are beginning to play by the same rules as our industrial competitors. Only in this way can we convince them that such practices -- which we heartily dislike -- are not in their long-range interest.
None of this means that Ronald Reagan himself has yet embraced this approach, which clearly marks a shift away from supply-side notions of unfettered trade, government withdrawal from the economy and private initiative. The fight in Republican ranks between free-market purists and pragmatists in business and Congress has only just begun.
The president came to office representing Main Street conservative populism against the entrenched power of Wall Street and Big Business. Elements of this populist agenda have been useful and valid. In its first term, the Reagan administration responded to grass-roots pressures to cut taxes and inflation. But, alas, in satisfying his populist constituency, the president aggravated the budget deficit and the foreign-trade deficit. The gap between taxes and revenues widened, the budget deficit grew, interest rates rose, and the value of the dollar soared, undermining U.S. competitiveness.
To take the steps needed to solve those problems, Reagan will have to turn away from some of his early supporters. But in seeking to harness the power of government to defend U.S. jobs and industry, the president will be helping to prevent a deep recession that might have dire political, as well as economic results.
If the economy turn down in 1985, the Democrats would make major congressional gains in 1986. Yet the underlying political and economic circumstances of the mid-'80s do not suggest much support for returning to the discredited Democratic policies of the last two decades.
On the contrary, if the American people are confronted with an economic slump resulting in part from musrooming imports, predatory Asian commercial practices and the unwillingness of the Washington power structure to take firm action, there could be a surge of radical populism characterized by unfocused anger at "foreigners" and responsiveness to leaders with simple answers.
In November's election, President Reagan scored major conservative breakthroughs in many Northern industrial cities, as well as among the let-America-be-great-again white electorates of the Sunbelt. That is a coalition that could become much more vocal in support of economic jingoism.
Michigan's 15th Congessional District, a blue-collar Democratic stronghold with a high concentration of auto workers, provides an extreme example of what could happen nationally in the event of prolonged economic problems made worse by foreign competition. Four years ago, Gerald Carlson, who previously had been linked to the Ku Klux Klan and the American Nazi Party, won the Republican nomination for Congress in the 15th district, and received 32 percent of the vote in the general election.
In 1984 Carlson won the nomination again, but was disavowed and repudiated by the Michigan State Republican Party. Running on a platform of white supremacy, protection of U.S. jobs and industries against foreign competition and rejection of both major parties, Carlson last month won 40 percent of the vote. The credo he outlined could be even more appealing in tougher times.
Populist politicians of the right as well as the left can exploit hard times under the right circumstances. Hitler and Mussolini did so in the 1920s and 1930s, and milder signs of the same phenomenon exist in economically troubled Western Europe in the 1980s. Neo-fascism of a sort is on the move in France, as evidenced by the current appeal of National Front leader Jean Le Pen, and antiimmigrant feelings -- expressed by demands for expulsion of foreign workers -- are strong almost everywhere in Western Europe.
Loss of American manufacturing jobs to Japan, Korea, Latin America and others, the continuing influx of illegal immigrants, and a return to double-digit unemployment rates could stir similar emotions here.
So it essential for political as well as economic reasons to deal aggressively with the loss of America's competitive edge.
The new industrial strategy I have in mind would not substitute government's wisdom for that of the marketplace. But it would involve a coordinated effort by business and government to defend and assert our national self-interest.
There is a sharp distinction between conservative industrial strategy and the industrial policy advocated by the left during and immediately after the 1982 recession. In both political and ideological terms, the distinction is crucial. Industrial policy, as originally advocated, focused on establishing a whole new framework for government intervention in the U.S. economy. It envisioned an industrial redevelopment bank, an economic planning council of sorts, and (in some blueprints) new government agencies for picking and finding winning technologies for the future.
By and large, these industrial policy ideas have been rejected by business leaders, the Reagan Administration, political conservatives and the more moderate wing of the Democratic Party as either unnecessary or unjustifiably intrusive and regulatory.
By contrast, an industrial strategy that makes government a supporter of business enjoys wide backing. And with good reason.
The benefits that foreign governments confer on their home industries include subsidies, tax breaks, government or government-guaranteed loans to foreign customers, and protection for local industries.
The United States also supports the private sector -- witness our current restraints on textile and automobile imports, accelerated depreciation allowances for business, and massive subsidies to agriculture.
But nothing this country does is as blatant as what is routinely done abroad. The Boeing Corp., a producer of superb, high-quality commercial aircraft, has been losing out all over the world to the European Airbus because of special government financing of Airbus sales.
For years, the Japanese telephone monopoly, NTT, refused to purchase any U.S. communications and electronic equipment unless it was sold through a Japanese company. And it was revealed after the recent tragedy involving gas leakages at Union Carbide's plant in Bhopal, India, that Union Carbide had been required to use local materials to construct the plant -- a provision that limited exports of U.S. materials that otherwise might have been used.
An exporting company in South Korea can easily avoid taxes. One technique was described by an executive vice-president of Daewoo Heavy Industries: "When we export, we don't pay any income tax, we don't pay the defense tax, and we don't pay tariff on the imported raw materials that go into the exports. That adds up to almost 40 percent of the production cost."
In Japan, the official tobacco and salt monopoly has set prices so that American brands of cigarettes cost up to 40 to 50 percent more than Japanese brands. And in some Third World countries, companies often produce petrochemicals with the help of natural gas furnished free or at minimal cost by the government.
Conditions like these in other countries may provide a basis to rally support for a broad government-business plan to restore U.S. competitiveness. This plan, which will have to include painful measures to reduce the deficit (and thus the value of the dollar), may be more palatable if it is presented in a context of economic nationalism.
Unfortunately, the Treasury Department did not get off on the best foot with its proposed tax simplification plan. Treasury's proposals to reduce depreciation allowances for business and end preferential treatment for capital gains would hurt many of the same vulnerable industries that have been hardest hit by the overvalued dollar and foreign business-government practices.
But not long after Commerce Secretary Malcolm Baldridge pointedly observed on Dec. 7 that the suggested revisions in the depreciation allowance would make it harder for U.S. companies to compete with better-aided foreign rivals, Treasury Secretary Donald T. Regan said the revisions were being reconsidered. Thus, the impact of legislation on U.S. competitiveness is finally starting to receive the attention it deserves.
Some experts hope to devise a tax reform that enhances the competitiveness of U.S. firms. One idea, already discussed publicly by Chrysler President Lee Iacocca, would levy a 10 percent tax on the transfer of all goods and services -- including imports. Employers with U.S. payrolls might be able to use these tax payments to offset some of their required Social Security tax payments to the federal government. Social Security funds would not be reduced, but only companies with U.S. payrolls would be eligible for what amounts to a rebate on the transfer tax. Such a tax would raise large revenues -- an estimated $60 billion after rebates -- and would force our trading partners to help reduce the U.S. deficit, since foreign exporters to tis country would not qualify for rebates. Its drafters believe the plan would not violate the General Agreement on Tariffs and Trade (GATT).
Many other facets of U.S. policy need to be overhauled to stop the erosion of the U.S. trade position.
Antitrust laws must be further liberalized to give U.S. companies a fuller opportunity to pool their research efforts and their knowledge of overseas markets. Pooling of research, when approved by the Justice Department, can avoid costly overlap. There is a precedent for this in Justice's approval of a new company in which research efforts into a fifth generation of "intelligent" computers is being shared by a number of computer firms.
Also, the Watergate-era straight-jacket of the Foreign Corrupt Practices Act of 1977 must be loosened. In countries such as Indonesia, U.S. companies are hamstrung by the fact that Japanese and South Korean firms frequently make large payments or provide special deals to local officials or businessmen in return for import licenses or approval of investments. Such payments are subject to stiff penalties under the U.S. law.
U.S. Trade Representative Brock has testified before Congress that the law has cost U.S. industry billions of dollars in sales and thousands of jobs. Economist Lawrence Krause of the Brookings Institution blames the law for much of the business lost to the Japanese in developing nations like the Philippines and Indonesia.
In addition, Congress should expand the role of the Export-Import Bank, the government agency which provides loans to foreign buyers of U.S. goods. The recent recommendation for this by the President's Task Force on International Private Enterprise is much worthier than Office of Management and Budget Director David Stockman's advice that Ex-Im funds be cut.
In the economic conditions of the '80s, financial terms can often affect the outcome of a business deal as much as quality. A difference of half a point of interest can mean millions of dollars to a foreing buyer. The 172-page report of the President's Task Force is veritable catalogue of unfair credit practices by foreign governments.
None of these steps will bring relief to the vulnerable U.S. economy overnight. But they would bring gradual benefits.
Without a coherent approach to the competitivenes problem, our foreign trade deficit could soon be as big -- and possibly as troublesome -- as our federal budget deficit.
A government-business politically feasible, middle-of-the-road approach that does minimal violence to either the current views of government's role or the free-enterprise system. Public opinion supports most of the relatively limited steps described above, just as national business organizations do. It is also a bipartisan idea endorsed by Democratic heads of three major business organizations -- Alexander Trowbridge of the National Association of Manufacturers, Jack Albertine of the American Business Conference and Arthur Levitt of the American Stock Exchange.
There is ample precedent for pro-business activism in time of economic crisis. President Roosevelt embraced business-government collaboration in the early New Deal. In 1985, only a Republican can implement the required steps, however. Just as it took a proven anti-communist, Richard M. Nixon, to open up U.S. relations with communist China and launch d,etente with the Soviet Union, so may it take a proven foe of government activism to bring about real collaboration between government and business.
It is worth remembering now the early days of the republic. Confronted with a great national financial crisis, the new leaders turned away from the hands-off philosophy of Thomas Jefferson to espouse Alexander Hamilton's "politics of commerce." Conservatism faces a similar choice today, and the wisdom lies with Hamilton. He would have approved of a national industrial strategy.