Reps. Dan Rostenkowski and Richard Gephardt and Sen. Lloyd Bentsen say that their proposal for a 25 percent import surcharge is a shot across the bow of our trading partners. Like every shot across someone's bow, this one would miss its target. But it would score a direct hit on American businesses, workers and families.
The Rostenkowski-Gephardt-Bentsen bill is no different in principle from the Smoot-Hawley tariff, which helped precipitate the Great Depression. Even some of the circumstances are uncomfortably similar: a growing debt burden in the developing nations; a progressive decline in American agriculture because of the rise of the dollar against other currencies in real terms; a failure to establish a stable international monetary system. In 1929-30, instead of correcting these problems, Congress enacted and President Hoover signed the Smoot-Hawley tariff, which hiked duties across the board. It was the last straw for world trade. The debtor nations could not repay their debts if they could not export to us. They sought to ease the pressure by devaluing their currencies and imposing retaliatory tariffs. The dollar rose even farther. The world economy imploded.
The Democratic sponsors of the new protectionist bill seem to want to repeat the same mistake. The main provision is a 25 percent tariff on any country whose exports to the United States are 50 percent higher than imports and whose world exports exceed world imports by 65 percent. (Why the difference? There's almost a $100 billion statistical discrepancy between total world exports and world imports, even though the two are obviously identical; yet these statistics are supposed to decide whether or not we trigger an all-out trade war!) It turns out that this would selectively target four countries: Japan, South Korea, Taiwan and Brazil.
It's easy to see who this bill would not help: American farmers. Japan, South Korea and Taiwan all make a living by importing raw materials and food and exporting manufactured goods. Japan, for example, is our single biggest agricultural customer. And to the degree that American farmers compete with Biazilian farmers, it is mostly abroad, not in U.S. markets. The 25 percent tariff would hike the prices paid by American farmers for equipment, though the world prices they received would be no higher. And U.S. farmers would be the first victims of any retaliation by other countries.
Would the bill at least reduce our competitive disadvantage in manufacturing? No: Since the tariff is selective, the main result of a 25 percent tariff on Japan would be to shift Japanese goods to Europe and European goods to the United States. This wouldn't help our trade balance at all.
To the degree that any American businesses could gain, it could only be at the expense of other American businesses -- and, of course, American households. Both would be hit with price markups from foreign and domestic suppliers. American goods would cost more at home and abroad. Productivity and our standard of living would fall, and we would lose jobs. Any reduction in our imports would be more than matched by a loss of exports. And how can Brazil repay its debts to us if it cannot export to us? How can Japan invest its savings in our country if it cannot transfer the resources to us through trade?
In solving a problem, it helps to know what the problem is. Part of our trade deficit is not a problem. Countries that grow faster than the rest of the world, as we have done, generally import capital seeking a higher return, in the form of a trade deficit. This part of the trade deficit will automatically disappear if other countries pursue growth-oriented policies; if not, we don't need to slow down our economy to reduce the gap, as long as the goods are used to increase our economic capacity. The United States ran a trade deficit for its first 100 years.
But part of our trade deficit is a problem. As in the 1920s, American farmers, manufacturers and mineral producers -- industries that export or compete with imports -- have been priced out of world markets by the dollar's rise. Just as the fall of the dollar in the 1970s provoked protectionism abroad, the rise of the dollar in the 1980s has led to calls for protection in the United States. The instability of exchange rates has cost many jobs in both the United States and the Third World.
The obvious answer to a monetary policy that permits a rising dollar or a falling dollar is a monetary policy that preserves a stable dollar. We need a domestic monetary policy geared to the value rather than the quantity of money. And we need to return to an international system of stable exchange rates that is neither inflationary nor deflationary. (The Rostenkowski-Gephardt-Bentsen bill does have a section calling for movement toward stable exchange rates.) At the same time, we need a Reagan Round of talks on trade liberalization, patterned on the successful Kennedy Round of the 1960s. This was the goal of the statesman who designed the postwar Bretton Woods monetary system: to dismantle the beggar-thy-neighbor protectionism and competitive currency devaluations of the 1930s.
The Democratic Party is now going through a well-publicized identity crisis. The protectionist bill shows the difficulty the Democrats are having in hammering out a consistent philosophy. The tariff would hurt the farmers for whom the Democrats want larger federal subsidies. In the field of tax reform, many Democrats propose new disincentives for investment that would worsen the competitiveness of precisely the same industries they are trying to "protect."
Politically, the Democrats might do well to consider the kind of luck we Republicans had with the ideas they are now thinking of adopting. The Smoot-Hawley tariff was the prelude not only to national economic but also Republican political disaster. As E. E. Schattschneider remarked about the soon-to-be-minority Hoover Republicans in his classic study of the Smoot-Hawley tariff: "To manage pressure is to govern; to let pressures run wild is to abdicate."
The Republicans used to be the high-tariff party and the Democrats the party of free trade. The switch underlines a larger role reversal of the two parties: Republicans have become the party of growth and opportunity, and the Democrats the party of tax increases and protectionism. As a rule, I don't mind it when the Democrats act like a minority party -- confused, contradictory, narrow in scope. But when the future of our economy is at stake, I wish they would stick to ideas, such as tax reform, that make better economic and political sense.