The playing field in world trade is not level; it is blatantly tilted against the United States.
And unless that field can be made level, we will rapidly slip from the major leagues to the minors--with small chance of a comeback. In 1982, the U.S. deficit in foreign trade was $43 billion; for 1984, Martin Feldstein, chairman of the President's Council of Economic Advisers, predicts that this deficit could reach $100 billion. This widening gap between imports and exports significantly contributes to lost jobs and the erosion of the capital base of many essential industries, including machine tools, steel, electronics and automobiles.
A strong economic recovery--contrary to popular economic folklore--could worsen this deteriorating situation. Since several major competitor nations are expected to lag behind the United States in their rate of recovery, price competition from them could play havoc with our recovery and our trade deficit.
With good reason, government and business leaders are concerned. Unfortunately, this concern has become polarized into an either/or position: protectionism or free trade.
For example, in The Post, Wolfgang Hager's defense of protectionism (Outlook, May 15), was followed by Bill Brock's response in defense of free trade (op-ed, June 13). These essays --a microcosm of what's being played out daily in Washington, in academia and on the 6 o'clock news--are attempts to come to terms with the issue of international competition. But, like most extreme solutions, both are wrong.
For one thing--and this is probably the most important thing--these either/or approaches fail to take into account some very basic realities of the business world in 1983.
It's true that protectionism would provide immediate, temporary help to certain industries--including the auto industry. About 28 percent of the cars sold in America are imported-- 21 percent are from one nation, Japan. And in June of this year, the Labor Department ruled that an estimated 5,200 workers laid off from Chrysler Corporation plants in Newark, Del., and Detroit can apply for special aid because imports cost them their jobs.
But rushing in with an across-the-board protectionist quick fix could backfire on American business. America simply can't afford to alienate and lose world markets through protectionism and its backlash. The fastest-growing markets in the world are overseas; Brazil and Mexico combined will probably represent a larger auto market than the United States at the turn of the century. And economies in the Far East are on impressive growth curves.
Like the ill-fated Smoot-Hawley Tariff Act of 1930, protectionist measures carry the potential for lost markets, trade wars and depression. The price of such "relief" is one that American business can't afford.
If protectionism isn't the answer to our trade problems, free trade extremism isn't either. Free trade ignores the historical fact that current trade agreements were formulated at a time when America was the top dog in production and sales in world markets--and especially in domestic markets. It ignores the new reality that, both in terms of production facilities and marketplaces, competition is now global.
There is nothing wrong with the new game; it's really the major leagues. Global competition--the playout of economic Darwinism--has been a potent spur to American business to improve its productivity and quality. What is wrong is that while American companies are playing in a new international trade game, the U.S. government is still expecting them to play by the old rules.
We are up against aggressive, potent competitors, backed by their governments--while experts inside and outside government intone Adam Smith's theories and pretend it's still 1950 in terms of U.S. worldwide economic dominance. Most other governments have realized that the game and its rules have changed--and now assist the "Invisible Hand" through all-too-visible programs and policies that give their industries a better-than-even break in the world.
Because the U.S government still tries to play by the old free trade rules, America lacks a trade policy that's responsive to the new realities of international competition. For American businessmen and workers--sent out into the global marketplace to compete without help from government--the playing field is not level; it's tilted against them.
To make that playing field level--to allow American business and American labor to be on the same footing with their global competitors--we have to address two major areas immediately.
* The first area concerns purchasing power parity. Right now--because of currency exchange rates and the system of value-added taxes--some of our competitors have a substantial pricing advantage; over $1,500 per car for Japan. This advantage obviously tilts the playing field for the competition.
Exchange Rates: With the current strength of the dollar and the intentionally low values of certain other currencies, such as the yen, some of our trading partners have a big edge over American businesses when they compete in the U.S. market. In the auto industry--a prime example--it is estimated that the Japanese have a cost advantage of $600 to $800 per car because of an estimated 20 percent undervaluation of the yen.
Value-Added Taxes: Most of America's major competitors use value-added taxes, which they rebate to their manufacturers when goods are exported. For Japan, this tax rebate equals another $600 to $800 per car. U.S. import duties come nowhere near equaling the rebated taxes, so the imported goods have a substantial price advantage over American-produced goods. And the American goods have to shoulder the full effect of U.S. federal, state, local, Social Security, and other taxes.
The second major area concerns the lack of a coherent, pragmatic industrial policy to help American businesses to become and/or remain competitive--especially for:
Riding Out Downturns. Many of America's competitors have developed programs to help their industries remain solvent during cyclical downturns. America has no such program, and with each economic downturn--even predictable ones in cyclical industries like chemicals and autos--American industries lose ground to foreign competition. Once they lose too much ground and get on to a precarious financial footing, they usually cannot be resurrected. Their jobs disappear overseas forever, by the hundreds of thousands.
Carving Out and Preserving Market Share. Some of America's competitors, such as the Japanese, have learned that they can establish market share through a low price/low profit game plan applied over the long term. They can only do this with solid financial backing from their governments and their closely integrated national banking systems, something American industry doesn't have. As a result, American businesses frequently cannot afford to pay the long-term "entry fee" to gain and hold position in desirable markets.
That these two areas--purchasing power parity and industrial policy--demand action is obvious to many Americans, but not to enough of our elected representatives. According to recent polls conducted by Louis Harris Associates and the Los Angeles Times, the percentage of Americans who favor government policies to preserve or expand our industrial base is double the percentage of congressional leaders who are similarly inclined.
What must government and business do, starting today, to deal with the new trade realities and to level out the playing field?
1. Government must negotiate more acceptable exchange rates, rates that reflect the real purchasing power of different currencies and that are indexed over time to changes in relative inflation rates.
2. Government must find ways to compensate for the pricing edge created by VAT rebates. DISCs (Domestic International Sales Corporations) have never been an effective tool for this; and import duties, because they are too low, have been equally ineffective. Our taxation policy should get in step with the rest of the world.
3. Government and business together must find ways to help fundamentally viable American companies absorb the impact of recessions--and to allow American business to compete with foreign industries whose governments and infrastructures support low price/low profit marketing strategies.
This kind of aid could be in the form of loans or of loan guarantees similar to those provided to Chrysler. A new structure to accomplish this program could incorporate the concept of a "domestic IMF"; it could arrange emergency financing to support those businesses that have clear, workable plans to improve productivity and increase operating efficiency. There's no question that the capital for these loans is available; I've often wondered why the American public and business community have allowed American banks and public institutions to lend $500 billion to Third World countries and businesses while we have such pressing needs here at home.
In the international trade game, time is not on our side. The next several seasons will determine, irreversibly, whether America stays in the world trade major leagues. We need solid policies now, if we're going to have a chance to play on a level field.
As far as autos are concerned, until we get these policies in place, we must negotiate or legislate an extension on quotas on Japanese imports. Without these quotas as an interim measure, the American auto industry as we know it won't survive long enough to have a chance to play on that level field.
A level field means a fair game--a game in which all players go by equivalent rules. A level playing field in international trade is necessary to put the biggest game in the world back on the level.