Sen. Richard G. Lugar of Indiana, the new chairman of the Foreign Relations Committee, is a firm advocate of free trade and open markets -- up to a point. That point is the system of "voluntary" -- i.e., involuntary -- quotas on imports of Japanese automobiles. The quotas expire at the end of March, and the Reagan administration has not yet decided whether to extend them.
Sen. Lugar, like most of Congress, wants the quotas continued. The senator's reluctant support illustrates an increasingly important dilemma for American economic policy. The chief argument in favor of quotas, in his view, is the very high exchange rate of the American dollar against the Japanese yen. In terms of the Japanese goods that it can buy, the dollar is now overvalued by about one-third. That's an enormous disparity.
The Japanese, with very high labor productivity in their factories, had a substantial cost advantage over their American competitors even when the two currencies were more nearly in line with each other. Most of the American manufacturers complain bitterly that the improvements in their efficiency since then have been offset, and more, by the continuing rise of the dollar.
The American industry itself is split over the quotas. General Motors says that the time has come to end them, and to adapt to present conditions. GM's chairman, Roger Smith, argues that side of the case on the opposite page today. Other companies, with fewer resources than GM's, object that adaptation is impossible with the dollar at its present level. They want to keep the quotas in force.
But that kind of protection isn't cheap. Robert W. Crandall of the Brookings Institution has calculated that the quotas have raised the prices of the imported cars by about $1,000 each, and the prices of American cars by about $400. That adds up to a total cost to American buyers of something over $4 billion a year -- an interesting example of a tax imposed by trade regulation, subsidizing both importers and domestic manufacturers and yet appearing on no public budget. Not all taxes are enacted by Congress.
Trade quotas are bad in principle as well as extremely expensive in practice. They delay and deflect the process that pushes American industry to meet the challenge of the world market. But the high dollar brings them the grudging support of people like Sen. Lugar, who are not the natural allies of the protectionists. And why is the dollar high? The federal budget deficit is sucking in money from abroad, pushing up the exchange rate. It's a case of one bad policy inciting another. But General Motors is right. Protection can't shield the American economy from the effects of past budget errors and present currency misalignment. It will only prolong their ill effects.