Why Nobody Invests in Japan
Tokyo’s Failure to Welcome Foreign Capital Is Hobbling Its Economy
Since 1962, U.S. trade policy has been moving steadily away from the liberal trade approach which had characterized it since 1934 and which has been the objective of every administration since that time.
In 1962, the Trade Expansion Act passed the Congress with the largest majority in the history of the trade agreements program and led to the Kennedy Round of trade negotiations. Since 1962, however, the number of U.S. industrial imports subject to quantitative restrictions, including "voluntary restraint" by foreign suppliers, has risen from seven to 67-a number which will shortly exceed the total of any other industrialized country, and whose restrictive impact is undoubtedly greater than the liberalizing effect of our tariff cuts in the Kennedy Round. And Chairman Wilbur Mills of the Ways and Means Committee-who helped pilot the 1962 law to its overwhelming passage-commented last year that the Trade Expansion Act would have been unlikely to attract 50 votes on the House floor in 1970.
The shift has come along an accelerating trend line. In 1964, Congress passed the Meat Import Act-the first legislated import restrictions for a major industry in the postwar period. There were attempts in 1964 and 1965 to negotiate voluntary restraint agreements covering U.S. imports of woolen textiles. The modest trade bill submitted by the Johnson Administration in 1968, whose only significant liberalizing feature was its request for repeal of the American Selling Price system of customs valuation (ASP), was never even reported out of the Ways and Means Committee; and the Administration decided that it had to negotiate voluntary restraint agreements on steel and meat to avoid turning the bill into widespread protectionist legislation. And the Nixon Administration sought to negotiate voluntary restraints on synthetic and woolen textiles throughout 1969 and 1970.
The most dramatic evidence of the shift in Congressional and public opinion developed in 1970. The so-called Mills bill, which would have levied quotas on all textile and shoe imports and tariff quotas on two minor products, passed the House of Representatives by a vote of 215 to 165. It would also have sharply increased the likelihood of additional import restrictions by a drastic loosening of the escape clause. It would have relegated adjustment assistance-the most constructive alternative to import restrictions-to such a subordinate position that the concept would have been totally discredited.
The bill's only concessions to liberal trade policy were its hedged repeal of ASP, and a provision that the President could waive the import restrictions if he deemed them against the national interest. The Senate Finance Committee passed a bill similar in its restrictive features, omitting ASP repeal. Only the adjournment of the 91st Congress precluded the passage of a new trade law along these lines.
The question is whether the trend will continue, with more products covered and less presidential flexibility to avoid them, or whether it can be reversed so that momentum toward trade liberalization can be renewed. If it cannot, history amply demonstrates that further slippage away from free trade is probable.
Two major arguments have supported a liberal U.S. trade policy in the postwar period. The first is the standard economic case for free trade: the improvement of our economic wealth and income by exchanging goods which we can produce most efficiently for goods which can be produced more efficiently by others. Imports help moderate inflationary tendencies and maintain competitive pressures on U.S. industry. Freeing of trade reduces the discrimination against the United States inherent in regional economic arrangements elsewhere in the world, notably the Common Market and European Free Trade Association; this both protects our exports and reduces the incentive for American firms to invest behind the trade barriers of those groupings.
It is also argued that free trade on balance creates jobs in the United States, because of the famous paradox that our exports use more labor than would be necessary to produce at home the goods currently imported, but primarily because we continued to run a surplus of exports over imports. And it is also argued that freer trade supports a continuation of the trade surplus and thus helps our balance of payments.
The economic argument was never sufficient by itself, however, to support a liberal trade policy for the United States. Trade has simply represented too small a share of our total economy, especially on the import side where the benefits are widely diffused among consumers. The trade surplus argument was always phoney: any restrictions on U.S. imports would be fully or largely offset, in trade balance terms, either by our compensation on other imports or a loss to our exports from foreign retaliation; it would be irrelevant to the outcome whether our trade balance started from a surplus or deficit position.
Though the economic argument was always marginal, it was generally regarded as positive by the major political groups in the United States. But it was the foreign policy case which provided the real impetus for liberal trade policies in the United States in the postwar period. Expanded exports were an essential component of the reconstruction of Europe and Japan, and a liberal U.S. trade policy was therefore an essential corollary to Marshall Plan aid. Later, freeing of trade was seen as a key to forging an Atlantic partnership between the United States and Europe, thereby to contain communism. Our interest in keeping the lower-income countries free from communism, and their obvious need for increased markets abroad to complement our capital and technical assistance programs, also required liberal trade policies. In submitting the Trade Expansion Act, President Kennedy went so far as to state that, "Our efforts to maintain the leadership of the Free World thus rest, in the final analysis, on our success in this undertaking."
Today, neither the economic nor the foreign policy argument for liberal trade commands much support in the United States. More disturbingly, they have lost support for reasons which appear to be deep-seated rather than subject to rapid reversal. Most disturbingly, they seem likely to continue to lose support in the years ahead unless new policies are developed and pursued both here and abroad.
The most important shift in the U.S. political constellation on trade policy is organized labor's move to the protectionist camp. This shift cannot be explained simply by high unemployment. Labor was becoming more protectionist even as unemployment was dropping steadily after 1962, and had adopted a completely protectionist stance when unemployment stood at its post-Korea low in early 1969. A return to overall full employment alone cannot be expected to bring organized labor back to the liberal trade camp, though it could of course only help.
In its role as a factor of production, labor can adopt either of two courses. It can be essentially dynamic, supporting rapid change with the objective of increasing national output and hence overall welfare- accepting, as a price, the occupational and personal dislocations which must inevitably accompany rapid change. Or it can adopt an essentially static attitude, giving up income but avoiding many of the costs of dislocation.
Organized labor now seems to have chosen the second approach, at least concerning foreign trade. Organized workers have apparently achieved sufficient income levels that the movement as a whole has become more interested in avoiding shifts of geographic location, seniority rights, local interests, etc. than in seeking higher real incomes elsewhere. The dramatically improved competitive position of other countries has of course had an important effect on this decision. Protectionist trade policies on the part of labor may be an inevitable consequence in a highly developed country where foreign trade plays a small role in the overall economy, and which faces tough foreign competition.
This decision by organized labor has been promoted by the accelerated pace through which international trade and investment transmit technological change. The dislocations of dynamism may be acceptable up to a point, but unacceptable beyond. As the most visible embodiment of such rapid change, the multinational corporation has become a special target of organized labor; and it must be recognized that these corporations command factors of production-capital and management-which are much more mobile internationally than is labor, and which thus appear across the bargaining table as invincible and unfair competitors.
Lawrence Krause has identified another underlying cause of organized labor's change of position-its decreasingly representative nature as the overall U.S. labor force grows primarily in the services rather than goods- producing sector.[i] Most goods producers are unionized and most services producers are not. The trade policy impact of this development is critical because workers in the services industries can only gain from free trade; and only the goods producers can lose from free trade, since few services can be traded internationally.
Moreover, labor has not moved quickly enough in organizing the fast-growing high-technology industries as those industries have developed their share of the U.S. economy. This factor is also crucial for trade policy, since it is the high-technology industries which can compete effectively-a recent study shows that they produced a $9 billion trade surplus in 1969-and thus have a great interest in liberalizing international trade. The non- technology intensive industries, which cannot compete well-registering a deficit of over $5 billion in 1969-and thus want protection, are grossly overrepresented in the labor movement.
The single most potent political group in the country has thus turned against the economic case for a liberal U.S. trade policy. It is unlikely to return shortly and, in fact, may become increasingly protectionist as the international transmission of technological change accelerates even further. Organized labor may become even less representative as our major economic growth continues to take place in the largely unorganized services and high-technology industries. Even a reduction in the national rate of unemployment is unlikely to turn the tide. The next question is whether there are countervailing forces which appear likely to take up the economic case for liberal trade to offset this Swing.
A logical candidate is the consumer. Protectionist legislation would have a more adverse impact on consumers than most of the legislation to which their representatives have devoted so much attention, and they would be among the major gainers from free trade.
There are two new economic factors, of particular concern to consumers, which argue strongly for their mobilization in this regard. First, recent studies have discovered changes in the structure of U.S. unemployment which mean that a given level of aggregate unemployment corresponds to much sharper price rises in the United States than was the case even ten years ago-the "Phillips curve" has moved sharply against us.[ii] Second, at the present cyclical point of our economy, high unemployment coexists with the persistence of inflationary pressures. These new structural and cyclical situations make it exceedingly difficult for macroeconomic policy to cope effectively with inflation. Selective anti-inflationary policies, such as increased imports, have therefore become even more appealing than usual as a means to moderate price rises.
To date, however, consumer groups have not mobilized effectively on trade. This is largely because most of these groups are dominated by organized labor, and thus focus on the sharper costs of job losses from imports than their more general but widely diffused benefit in moderating prices. The shift toward a services-producing economy gives at least theoretical promise that consuming groups will begin to play a stronger role in support of liberal trade, either because they will influence organized labor in that direction or because the impact of organized labor will decline along with its failure to reflect accurately the composition of the labor force.
There is a curious paradox concerning the impact of inflation on the politics of trade policy, however. As just indicated, price rises increase the desirability of imports as a means to check inflationary pressures and thus should call forth the voice of consumer interests. But increased inflation also reduces the international competitiveness of U.S. industries closest to the competitive margin, and thus increases their protectionist pleas. The net impact on trade politics of changes in the rate of inflation is thus indeterminate, and may be essentially neutral. We cannot count on reductions in the present rate of inflation as contributing decisively to the political base of support for a liberal U.S. trade policy, though a return to full employment together with relative price stability would probably help appreciably.
A second possible countervailing force are the multinational corporations; their Emergency Committee for American Trade was a major force against the Mills bill in 1970. They gain greatly from international trade, since they can then use their various bases of production to sell anywhere in the world and thus increase their profits. Their effects will become more pervasive as more firms go multinational.
However, these same corporations lose least from trade restraints, since their variety of production bases means that they can avoid trade restrictions better than most by simply producing in or near the markets which they serve. Their greater concern is thus with maintaining freedom for their international investments rather than free trade. In addition, relationships with labor and domestic industries seeking protection have reduced the zeal with which some of them have supported liberal trade policies.
The multinational corporations can therefore be expected to continue to support freer trade, but whether their support will be concentrated enough to countervail the protectionist pressures is uncertain. If foreign retaliation against U.S. restrictions began to take the form of action against U.S. investments, their support for freer trade would undoubtedly increase, since exports would then become relatively more important to them.
Third, smaller industrial exporters-which would gain from reductions of trade barriers and suffer from foreign retaliation against U.S. import restrictions-should also oppose the projected trends. However, most of these smaller firms sell only a small share of their output abroad, and they account for only a small share of the political clout of U.S. business.
Agriculture is the U.S. political bloc with the greatest interest in achieving liberal world trade. About one-fourth of all U.S. farm produce is exported, and the share exceeds one-half for several key crops. Agriculture can be expected to continue to support freer trade, though its political importance will continue to decline as its share of the total U.S. labor force continues to fall. And the vigor of its support is being increasingly undermined by agricultural policies in the rest of the world.
Support for continued liberal trade policies on foreign policy grounds has also been sharply eroded. This is primarily due to the neo-nationalist views which counsel that we turn away from world involvement, and which are deep-seated and likely to continue to grow. They are particularly acute in the trade field, because trade more directly affects particular U.S. interests than do most other aspects of foreign policy-even military programs affect most Americans only indirectly, via the budget-and because of widespread views that the behavior of our main trading partners justifies a protectionist shift in the United States.
It is true, of course, that any need for the United States to help support the economies of the other industrialized countries through expanding our imports from them disappeared long ago. More broadly, however, the generally reduced fear of a threat to our security from the communist world- in the industrialized or lower-income countries-renders our society increasingly unwilling to inflict economic pain on important groups to promote our overall foreign policy; one of President Kennedy's main arguments for the Trade Expansion Act was the need to counter the "communist aid and trade offensive," and the theme of anti-communism ran throughout the message in which he proposed it.
Neo-nationalism in trade policy is characterized by repeated charges that the United States has given away, in purely commercial terms, much more than it has gotten in past trade negotiations. It is widely believed that America has done so to assure the success of successive trade negotiations, and thus achieve broad foreign policy objectives. As a result, the Congress has developed deep doubts that any administration can be trusted to negotiate "fair" trade arrangements-and is thus extremely reluctant to extend trade liberalizing authority. A corollary belief is that the United States does not insist that other countries live up to their international obligations in the routine daily business of international trade relations.
Here, too, the future looks even more difficult than the past. Non-tariff distortions now probably rival tariffs as barriers to trade, and national policies in new areas (such as protection of the environment) will add to the list. In view of their disparate nature and subtle effects, these distortions are very hard to measure. Our analyses of the trade effects of tariffs have always been unsatisfactory, but at least they could be made. But it will be exceedingly difficult to demonstrate convincingly that the United States-or anybody else-will have gotten true commercial reciprocity from a negotiation on non-tariff distortions. It may then become even harder to convince Congress of truly reciprocal bargaining by the Executive branch in the future.
A tough trade policy stance by the Executive, producing fair treatment for U.S. commercial interests from the more routine business of trade relations, is thus an essential precondition for any new Congressional grant of trade liberalizing authority and any major new international trade negotiation. Such a policy will itself create foreign policy problems, though presumably of lesser magnitude than those that would be caused by the protectionist trends which the policy would seek to avoid.
The foreign policy case for a liberal U.S. trade policy has also been undercut by the practices of our major trading partners. The Mills bill could have been characterized as sharply escalating an international trade war, but not as starting one.
There are three major problems which concern the trade policies of the European Community (EC). The most important is the Common Agricultural Policy (CAP), which sharply increases production through the maintenance of price levels well above world prices, with no production controls. World trade in the commodities covered by the CAP is affected in two ways: imports are restricted through variable levies which fully protect Community producers against the lower prices of outside suppliers, and exports are subsidized to sell abroad some of the induced surpluses.
The CAP has a highly significant impact on U.S. trade policy through its impact on our own agricultural community. As already noted, U.S. agriculture is now the sole major political bloc here which strongly supports liberal trade. However, restrictions on agricultural imports by other countries-of which the CAP is the most restrictive and covers the major foreign market-reduce agriculture's support for liberal trade and undermine its position badly.
The second Common Market problem is its preferential trade arrangements with its former colonies and, more importantly, the semi-developed countries surrounding the Mediterranean. The trade impact of these arrangements on America is not yet clear, although individual problems are already jeopardizing the support of particular industries for liberal trade policies.
It is clear, however, that the arrangements violate at least the spirit of the most-favored-nation principle of the General Agreement on Tariffs and Trade (GATT), under which all member countries are to benefit from tariff reductions extended by any other member country. They thus undercut supporters of the most-favored-nation principle and liberal trade generally. The Community moves also support those who would have the United States work out its own preferential deals, especially in Latin America and perhaps East Asia. The resultant world of large trading blocs would probably add impetus to the protectionist movement.[iii]
Third, the Community's nascent industrial policy could pose new problems if it were to restrict the activities of U.S. companies, including their subsidiaries in Europe. There has already been a proposal for preferences in EC government procurement for companies controlled by Community nationals in sectors where the governments have helped finance research and development, which would represent both a non-tariff barrier to trade, and discrimination against foreign investors. There could certainly be more such steps, since one of the basic objectives of the industrial policy is to create European-wide companies which can compete more effectively against the U.S.-based multinational firms. If an EC industrial policy were to become significantly restrictive against both foreign investors and imports, the major adverse impact would be on the U.S. multinational corporations-precisely the group which has continued to support liberal trade for the United States more strongly than any besides agriculture.
All of these Community trends are likely to continue in the future, particularly if the EC successfully expands its membership to include the United Kingdom and the other applicants. In broad terms, a new Community of Ten would want to take steps to distinguish it as "Ten." More specifically, the agricultural restrictions would then include another major market; Britain has already begun to raise its price levels and accompanying import restraints. Preferential arrangements would be extended to some of the former Commonwealth countries, and all of these arrangements would of course then include trade with the Ten. Even more important, expansion of the Community virtually assures that new preferential arrangements will be worked out with other European countries unable to obtain full membership, bringing a large volume of additional trade within the discriminatory grouping. And the industrial policy may become one of the next major Community efforts, of particularly great interest to the British in view of their competence in various high-technology sectors and their desire to improve their competitive position against U.S. firms.
The difficulties which these developments raise for maintaining political support for a liberal trade policy in the United States among affected economic groups are exacerbated by growing doubts that the United States will obtain any significant political advantages from European economic integration-the basic rationale for U.S. support for the whole enterprise. This view usually focuses on the apparent lack of political spill-over from the economic steps, and is stimulated by the likely association of the European neutrals-which could only impede progress toward political unity.
Just as the economic view often ignores our large and growing volume of trade and investment with Europe, however, this political view seems to assume that a common European defense and foreign policy could have been expected to develop in a decade, and that the plans and progress already made toward European monetary integration are not the most profoundly political of steps which could be pursued by sovereign nations. Nevertheless, the broad foreign policy doubts exist and add to the problems raised by the EC economic policies themselves.
The Japanese situation raises three important problems which add to the bleakness of the outlook for a liberal trade policy in the United States. First, the pace of Japanese liberalization, though quickening now, has lagged far behind liberalization in the other industrialized countries. Second, there is a widespread view that administrative practices and the business-government collusion of "Japan, Incorporated" will continue to prejudice the trade opportunities of outsiders whether or not explicit barriers remain. Finally, barring a sizable revaluation of the yen, Japan's competitiveness will probably continue to grow and thus keep Japan in the forefront of protectionist attacks in the United States whatever the policies which it pursues.
The final foreign policy problem is the lower-income countries. There still remains a generally sympathetic view in the United States toward their need to expand their export markets, but that consensus is beginning to change. Textile imports from Taiwan and Korea are regarded as equally dangerous as textile imports from Japan. Imports of electronic components and other relatively sophisticated products from subsidiaries of U.S. companies in Mexico, Taiwan and elsewhere are of increasing concern to those U.S. firms and workers with which they compete. If U.S. firms continue to expand their activities in these countries, essentially to take advantage of lower labor costs in producing standardized products, their lower-income status may be increasingly ignored by wide segments of opinion in the United States as trade policy toward them develops.
Finally, the protectionist shift is partly a reaction to the relatively pure free-trade approach of the Trade Expansion Act itself. Its major impact was its changes in the escape clause, the traditional safety valve for meeting the temporary but legitimate problems periodically caused for entire U.S. industries by imports. Precisely at a time when world economic competition was becoming much tougher, with the creation of the Common Market and the full emergence of Japan, the escape clause was tightened significantly.
During the 1950s, Presidents Truman and Eisenhower imposed escape clause restrictions on an average of twice yearly, and it was a credible alternative for industry complaints even when they faced less foreign competition. But between passage of the Trade Expansion Act in 1962 and 1968, there were no escape clause actions. The strength of the U.S. economy in this period would probably have reduced the number of cases in any event but the strictures of the Act, its interpretation by the Tariff Commission, and the Administration's efforts to avoid any disruptions of the Kennedy Round negotiations effectively voided the escape clause as an avenue for import relief.
The Trade Expansion Act also included the major conceptual breakthrough of providing for adjustment assistance to individual firms and workers injured by imports-a new alternative to import restrictions which could both zero in on specific problems and avoid disrupting international trade relationships. It enabled organized labor to support the Trade Expansion Act.
However, the adjustment assistance provisions were drawn so tightly, and interpreted so stringently, that not a single case of adjustment assistance was authorized through 1968. The present Tariff Commission and Administration have changed this situation as rapidly as possible, certifying adjustment assistance for 11 firms and over 15,000 workers and budgeting almost $250 million for it in fiscal year 1972. However, from a political standpoint, the administration of the program for its first six years has discredited the entire concept-though it remains the most valid alternative to import restrictions yet conceived.
Some would disagree with this analysis, and suggest that the situation today differs little from 1961. At that time, protectionist pressures also looked very strong. But a major presidential initiative in the very next year carried the largest majority of any trade legislation in the history of the United States.
It could happen again. But today differs sharply from 1961. At that time, Europe and Japan had just emerged as true competitors to the United States in the world economy; today, they exceed or equal us in a wide range of sophisticated product lines. Perhaps the most startling perception of change comes in remembering that one of the five "fundamentally new and sweeping developments" on which President Kennedy based his case for the Trade Expansion Act was "the need for new markets for Japan and the developing countries." We are unlikely to base a trade initiative today on the need to provide new markets for Japan.
In addition, the Trade Expansion Act was sold largely on foreign policy grounds-as the most important tangible step in the U.S. effort to create an Atlantic partnership with Europe, and thus to continue to contain communism. No such grand design exists today. It is extremely dubious that foreign policy considerations would suffice to carry such an initiative now. Finally, organized labor's shift has come wholly since 1962.
In analyzing developments in 1970, some have also suggested that the near- miss of protectionist legislation was due primarily, if not solely, to the Administration's support of textile quotas when its effort to negotiate "voluntary" export restraints with Japan broke down. This position undoubtedly affected the legislative situation deeply last year, and accelerated the success of protectionist efforts. It provided support for the concept of protectionism. It forced the Administration into an ambivalent posture on trade policy, despite its liberal positions on virtually every other trade issue, which is particularly important because the President is in by far the best position to take all of the factors affecting trade policy into account-including its diffuse but crucial economic benefits and its foreign policy implications, as well as its sharp economic costs to particular groups-and thus base his position on the overall national interest.
However, the problem is much deeper than any single industry, and the basic situation would be as outlined-whatever position was taken by President Nixon on textiles in 1968-70. And it should be remembered that Candidate Humphrey made the same pledge as did Candidate Nixon, and that the textile industry would have powerfully affected developments through the Congress in any event.
The development of U.S. trade policy along the lines described above could have a profound impact on overall U.S. foreign policy.
Trade policy uniquely pervades U.S. relations with all major areas of the non-communist world. Trade and related economic issues are already among the most important between the United States and Europe, and will become more so as the European Community continues to replace America as the single most important entity in international economic relations. Trade already heads the list of U.S.-Japan problems, as the textile issue demonstrates. Economic issues dominate relations between America and Canada. Expansion of trade is one of the greatest needs of the lower income countries, so U.S. trade policy will have a major bearing on our overall relations with Latin America, Asia and Africa-particularly since the level of U.S. economic assistance is unlikely to rise dramatically in the period ahead. And even our relations with the communist world would not remain unaffected if we helped resuscitate long-buried Marxist shibboleths by permitting economic confrontations in the West both to undermine Western unity and tempt individual non-communist countries to seek new economic, and therefore political, relations with the communist world.
The foreign policy impact of a restrictive U.S. trade policy would go far beyond dollars and cents, important as they are. Throughout the postwar period, the United States has largely been viewed as a generous country, which makes mistakes but whose mistakes are usually made in following policies intended to help the world as a whole as well as the United States itself.
Continued U.S. leadership of this type is probably no longer needed. In view of our pressing domestic priorities and the changing perception of our national interests by many Americans, it could probably not be sustained domestically at this time. But a lurch all the way to crass mercantilism could have a devastating impact on foreign perceptions of the United States.
Another key quality of U.S. foreign policy throughout most of the postwar period has been its predictability. In a crunch, others could usually count on the United States to provide the anticipated support or to seize a constructive leadership role. A posture of uncertainty in such a crucial area would also undermine U.S. foreign policy. The deliberations on the Mills bill in 1970, for example, spanned almost nine months with the outcome uncertain into the final two weeks-and with the uncertainty resumed when the new Congress convened. And the unpredictability could spread well beyond trade, since U.S. interest groups, hurt by foreign retaliation against our own import restrictions, would undoubtedly seek to retaliate themselves, perhaps by seeking to reduce U.S. troops in Europe.
The importance of trade policy to overall U.S. foreign policy will undoubtedly increase over the next few years. First, the economic interdependence of nations is increasing rapidly and protectionist steps by our country will thus have an ever larger economic, and therefore political, impact on other countries. Second, the economic content of overall U.S. foreign policy is likely to grow as these economic exchanges rise and as we reduce our direct military and political involvement around the globe. Third, the basic objective of present U.S. foreign policy is to forge new and mature partnerships with other areas of the world; many other countries rank trade policy very high on their priority lists, and it will be impossible to create true partnerships if we fail to heed these most crucial concerns of theirs.
Throughout the postwar period, U.S. trade policy-indeed, all U.S. foreign economic policy-has primarily served to promote overall American foreign policy objectives. The realities of the 1970s require that the "economic" component achieve a much greater share of the foreign economic policy equation. But there are those who wish to make overall foreign policy the handmaiden of foreign economic policy, and there is a strong risk that trade policy will come to dominate overall foreign policy disastrously. It is in this sense of steady erosion-not necessarily of abrupt cataclysm-that it is proper to speak of a trade policy crisis in U.S. foreign policy.
This picture is extremely pessimistic concerning U.S. trade policy, and therefore concerning a key element of overall U.S. foreign policy. Several new policy directions are necessary to reverse this trend, and even more sweeping changes may be required as well.
First, any administration will have to defend U.S. commercial interests vigorously around the world, including placing people who comprehend the importance of these economic problems in key positions in the U.S. foreign policy machinery. Credible policies in this direction are necessary, at a minimum, to avoid having Congress take trade matters increasingly into its own hands. Beyond that, it appears to be a sine qua non for any administration to receive authority from the Congress to embark on new trade liberalizing negotiations. This course itself will have important foreign policy costs, confirming the general thesis that U.S. foreign policy will undoubtedly be eroded by U.S. trade policy in the years ahead.
Second, adjustment assistance must be resuscitated politically to forestall new restrictions to meet import problems. It will probably have to become available at an earlier point in the adjustment process, more quickly after the problem is perceived, in bigger amounts, and in more innovative forms.
Third, increased flexibility of exchange rates would ensure earlier correction of payments imbalances among national economies. They would thereby relieve the political pressure on marginal industries which can compete only if equilibrium exchange rates exist, and avoid trade balance shifts which provide support for protectionist pleas. The United States has a particular interest in improving the exchange rate mechanism because the biases of the present system promote undervaluation of other currencies against the dollar.[iv]
Fourth, a liberal trade policy will have to be rebuilt with new political constituencies. Workers in the services industries, and who have major export interests, might decide that their interests differ from the organized labor movement on trade policy. Consumer groups might mobilize. The strong support of agriculture must be maintained. U.S. firms with direct and indirect (especially foreign investment) interests in freer trade must play a greater role. Foreign policy interests must resume their efforts on behalf of tough but liberal trade policies.
Even with such constituencies, however, it is uncertain whether any administration would be able to mount sufficient domestic support to launch a new initiative for freer trade-possibly the only way to avoid further slippage in the protectionist direction. It may well be asked, however, why America should once again have to take such a lead-as it has in every one of the numerous postwar GATT trade negotiations which culminated with the Kennedy Round.
The European Community has already become the major factor in world trade; with the expansion of its membership and the expected conclusion of additional preferential arrangements, it alone will account for almost one- half of world trade. Japan has been a major cause of today's trade problems. Foreign trade is more important to both Europe and Japan than to the United States. As several Congressmen are reported to have said, "Let a trade war come-we'll win it." There would, of course, be no winners in a trade war, but it is probably true that-in an economic sense, at least-we would lose least.
It therefore appears that the Community or Japan, or both, should take the next major international trade initiative. A logical time might be when the expansion of the Community is definitely achieved, since protectionist sentiments in the United States would otherwise rise precisely at that time in expectation of new threats to our commercial interests.
We should be under no illusion that it will be easy for the Community or Japan to take such a trade initiative. But the whole concept of shared responsibility for world leadership is most likely to develop first in such an area where their interests-and their relative power-provide a strong incentive for them to do so.
Faced with such an initiative from abroad, the United States would have only two choices-to turn its back on the world, or to coöperate in launching an effort to resume the postwar movement toward trade liberalization and hence avoid the broad international problems which would arise in its absence. The political problems cited throughout this article would not permit an easy response but the odds are heavy that, in such a situation, the American answer could only be positive.
No other step could so dramatically display both the full maturation and outward-looking nature of the new Europe and Japan, indelibly marking their arrival as major powers on the world scene-and at the same time confirming the wisdom of the unremitting support extended to them by the United States throughout the postwar period. Such a sequence of events could turn the tide of global trade policy, at once arresting the protectionist push and moving to preëmpt the greater problems which will arise tomorrow if they are not headed off today. And the passing of the mantle of world leadership in such a crucial field would mark the most concrete evidence yet that we have moved beyond the postwar period, and that shared leadership is indeed possible in the 1970s and beyond.
[i] See Lawrence Krause, "Trade Policy for the Seventies," Columbia Journal of World Business, Vol. VI, No. 1 (January-February 1971).
[ii] See George L. Perry, "Changing Labor Markets and Inflation," Brookings Papers on Economic Activity 3: 1970.
[iii] See Theodore Geiger, "A World of Trading Blocs?" Looking Ahead, Vol. 19, No. 3 (April 1971).
[iv] See C. Fred Bergsten, "The United States and Greater Flexibility of Exchange Rates," in Bergsten, Halm, Machlup, Roosa, eds., "Approaches to Greater Flexibility of Exchange Rates: The Bürgenstock Papers." (Princeton Univ. Press, 1970).