The New Cold War
America, China, and the Echoes of History
THE savant who first observed that politics is the art of the possible said much less than seems to meet the eye. The ex ante and the ex post concepts of "the possible" are disconcertingly different. One might better say that politics is the art of enlarging the possible. And one could well add that an indispensable step in the process is to have a view of the goals beyond the possible for which one is reaching.
Our exploration of a trade policy for the 1960s, therefore, will not proceed from the premise that a democratic government is the captive of the parochial interests it represents; on that assumption, we are slated for the dinosaur's fate. Instead, our general frame of reference is this: What trade policy does the decade of the 1960s demand for survival and growth? And what could a determined President hope to achieve, at the outside, if he exploited every possibility in his position of leadership?
In the past decade or two, a deep-seated change has occurred in the traditionally protectionist views of the more highly developed countries of the world. During this period, it has been possible for the twoscore members of the General Agreement on Tariffs and Trade to cut deep into their import barriers. The Organization for European Economic Coöperation managed to implement an unprecedented Code of Trade Liberalization. A European Coal and Steel Community has been achieved and a European Economic Community and European Free Trade Area have followed.
Each of these programs constituted a minor miracle of a sort, patently impossible before it actually occurred. The fact that the miracle none the less occurred can be ascribed to various forces. One of these forces--one which can easily be underemphasized--has been the persistent advocacy by most professional economists in the advanced countries for the reduction of trade barriers and the broadening of markets. The wartime emergencies and post-war problems precipitated economists into posts of key importance, not only in the United States but in many other advanced countries as well. In these posts, influenced by fresh professional analyses, the economists-turned-administrators have supported various programs of trade liberalization.
The basis of the economist's espousal of trade liberalization schemes, it is well to note, has undergone considerable change. Prior to World War II, the United States economist usually based his argument for reduction of trade barriers on some version or other of the comparative-advantage doctrine and, using all the antique illustrations of the virtues of specializing in wheat or cloth, saw the possibility of significant gains for the United States arising out of increased international trade. As the years went on, the economist's views changed somewhat. The underdeveloped areas began to be treated as a different case, demanding their own kind of trade policy. And the rationalization for liberal trade policies in the developed areas of the world grew substantially more complex. Comparative advantage was still regarded as relevant doctrine in many quarters. In addition, however, there is the notion that many efforts of research and production, like those in the field of atomic energy and rocket aircraft, involve such giant fixed costs that development would be impeded unless a huge internal market were available to the developer. Finally, there is the related worry that the control of the industrial structure in some countries and in some products has become so highly concentrated in a few hands that competitive pricing, competitive cost-cutting and competitive product development can be achieved only by merging a number of national markets.
These instincts--they are hardly more than this--have been fortified by various experiences in the postwar world. Extensive reduction of trade barriers by the developed countries through the GATT, the O.E.E.C. and the International Monetary Fund seems to have been a boon to most economies. Even more extensive schemes such as those embodied in the European Economic Community appear to have tripped off a considerable wave of investment and innovation in the countries concerned. And the economic pain associated with the displacement of hitherto protected national interests has not been anywhere near as great as had sometimes been feared.
But the economist's views on trade liberalization would not have been sufficient by themselves to move the mountains which have been shifted during the last decade. Economic rationalizations may have been a necessary condition for progress, but political considerations have provided an essential condition sufficient in itself. In the 1930s, it was a popular political notion that trade bred understanding and interdependence; that as countries expanded their trade, their hostile intentions contracted. This was an article of faith with Cordell Hull and it remains as a thread of conviction in some quarters. But as a galvanizing principle for action, it never had much vitality. Instead, the political justification for the major trade-liberalization projects today relates to the closing of ranks and the mobilization of power against outsiders. So, for instance, the justification to which the United States has been most responsive in opening up its markets to Japan is that the move forestalls Communist China from developing a foothold in the Japanese economy. The main political justification for the European Economic Community is the need to forge a unit so strong that it can bargain effectively with the United States, the Soviet Union or the British Commonwealth. The justification for the EFTA is to present an adequate countervailing force against the strength of the E.E.C.
There is not much doubt that the principal contribution which an appropriate trade policy for the United States has to make in the 1960s is political rather than economic. A critical problem for the United States in the decade ahead is by one means or another to maintain a sense of cohesiveness and common purpose among the advanced countries outside the Soviet sphere. Between 1950 and 1960 there has been a shift from an atmosphere capable of generating a Marshall Plan and a NATO to one in which the Western powers seem unwilling to maintain even their excessively modest commitment to the defense of Europe. British public opinion appears more confused and confusing than at any time since the war's end; some elements seem seized by a mood of pacifism and isolation, while others are so fearful of being isolated from the markets of the European Continent that they are prepared to accept a major reorientation of Britain's external relations. Belgium is licking her Congolese wounds, frustrated and unhappy about the equivocal support of her NATO partners. France is absorbed in the play of her Algerian tragedy, unable to turn to other problems while this one remains unsettled. And the confusion of Europe can easily grow worse before it gets better.
One reason for the confusion and uncertainty of Western Europe--not by any means the only reason--has been the fact that the United States has allowed its own policies to grow blurred and distorted. Our policies in the field of foreign trade and foreign aid illustrate the point in an acute way. An unending series of little concessions to domestic pressures has turned our trade legislation into a group of ambivalent statutes which hamstring the President in any effort to reduce the trade barriers of the United States and which constantly threaten to force him to increase the existing restrictions on imports. Today, his nominal statutory power to reduce tariffs up to 20 percent by negotiation can in practice be applied to a limited range of products. The statutory admonition to the President that he must avoid "serious injury" in the process is couched in such sweeping terms that it takes on a special meaning. It is not enough for him to protect an industry against serious loss or serious unemployment; he must also "protect" its market position in every product it manufactures. It is not enough to guard the industry against an absolute decline in sales volume or employment in each product; the industry must also be ensured that its share of the market will grow along with that of its foreign competitors. And it is not sufficient to authorize the President to restore earlier tariff cuts toward these ends; he is also admonished to raise duties further in some cases or even to lay on import quotas if necessary to achieve the needed level of protection. The same ambivalence has crept into our foreign aid programs, obscuring and confusing their objectives. On the basis of what they see, many countries suspect that our foreign aid programs are principally designed to collect adherents to our side in the cold war, to increase the influence of American business abroad and to get rid of unsaleable surplus products in our economy.
It seems unnecessary to argue the point that the need to maintain a common sense of purpose and of possible success among the Western democracies is more imperative than ever. To contribute to that unity various things will have to be done. First, we need to reestablish unequivocally the fact that there is a clear direction in our long-run policy--a long-run commitment to the continuous reduction of our trade barriers for as long as other developed countries will agree and as rapidly as the problems of internal adjustment permit. The reëstablishment of this image is needed not only for the general reassurance it is likely to give other countries but also for a much more immediate and insistent reason. If the President can cut United States tariffs considerably, it may be possible for a time to ensure that the two rival trading blocs of Europe--the European Economic Community and the European Free Trade Area--will also hold down their external trade barriers. It may be possible to ensure, for instance, that as France and Germany reduce their tariffs on automobiles in favor of each other in accordance with the provisions of the Treaty of Rome, they will also reduce their common automobile tariff as it applies to British and Swedish cars and to American and Japanese cars. And if they do, the economic schism between the European Economic Community and the European Free Trade Area will not grow so swiftly and so deeply as to present a formidable problem for the early future.
To secure the necessary powers to bargain for the reduction of these trade barriers, however, there would have to be great changes in the scope of the President's power to reduce American tariffs and in the way in which he exercised that power in tariff negotiations. If the President had the power to reduce our tariff by 50 percent over a five-year period, without the usual restraints of the present escape clause and peril-point clauses, this might be sufficient to bargain effectively with the European blocs; but any power of much narrower scope would almost surely be insufficient.
At the same time, the President could not sweep under the rug the problems of internal readjustment for the American economy which such tariff reductions might entail. On grounds of both equity and national growth, these problems have to be dealt with. One approach to the problem of adjustment is to give some sectors of the economy more time to make the adjustment if necessary. On that theory, the President could be empowered to restore a tariff rate if a reduction was causing serious difficulty, provided that the reduction would then gradually be put in force again over a specified span of years.
Another approach to the problem is through a trade adjustment program. Displaced labor or capital which needed redeployment could be given an assist by programs of retraining, by providing moving expenses and capital loans, and by technical assistance--operations of a sort well within the experience of the United States Government and of various governments in Europe. The capital and labor which could not be successfully redeployed--the housewives who could not move to another area to find a different job and the capital which was so irretrievably frozen or so highly specialized as to be lost to other pursuits--might require the payment of indemnity; but the United Kingdom, for instance, has handled precisely this problem with remarkable success in shrinking back the size of its cotton textile industry. Programs of this sort do not eradicate the adjustment problem. They can blunt the edge of it sufficiently, however, to ensure that the gains generated from increased trade are not offset by the losses involved in the cost of shifting resources.
Assuming that the problems of trade adjustment can be dealt with, one is entitled to ask whether the current balance-of-payment difficulties of the United States may be a reason for holding back from added steps of trade liberalization. The answer is a fairly unqualified no. On the contrary, it seems quite clear that the United States stands to gain from trade liberalization with Europe in balance-of-payment terms. European firms have had easy access to the United States market for some years. Firms in the United States have just begun to acquire equivalent access to European markets as import licensing systems have begun to be dismantled; and such firms have made only a beginning in the exploitation of these markets. Whether American firms will take full advantage of this recent surge of dismantling depends on their long-run expectations regarding access to these markets. If the present drift of events continues without some new initiatives in liberalizing trade, sellers face more and more discrimination in Europe as the common-market schemes move to completion. If the trend is muffled by measures such as those proposed here, sellers can be counted on to exploit their new opportunities.
Apart from resuming reciprocal reduction of trade barriers, the United States can develop a score of other measures which create a clearer image of its purpose. It would have to amend its disingenuous "national security" provision, which authorizes the President to impose import restrictions whenever imports threaten to impair our national security. Much more to the point as a national security measure would be a statute which granted the President the power to suspend existing import restrictions for some limited period in specified products whenever our national security would be materially strengthened by such a step. Such a power might afford the means for admitting products like Icelandic fish or Egyptian cotton at those critical moments when such a step could ward off the possibility of Soviet penetration into the economies of friendly countries.
Even if we were to make these changes, however, there is a clear risk that two or three years hence we may conclude that we were trying to clean the Aegean stables with a demitasse spoon. What if the crisis of purposelessness in the Atlantic alliance should persist and deepen? What if the European Free Trade Area and the European Economic Community can find no basis for bridging their growing differences? What if France-after-de Gaulle and Germany-after-Adenauer prove so confused in direction and so torn by internal conflict that what is left of the Atlantic alliance seems scarcely worth another ministerial meeting? Then we shall have to offer much larger and more challenging goals to the remnants of the alliance. Taking a leaf from the volumes which Europe has written in the last ten years, we may find that it is our turn to propose a customs union or a free trade area to the other developed countries--one in which the members of the E.E.C., EFTA and possibly Japan, Australia and New Zealand could share.
If this were what political unity demanded, the capacity of the United States to make the decisions essential for its survival would be tested to the utmost. It is hard to envisage a Congress which before the fact would authorize the President to negotiate such an arrangement, or which after the fact would ratify his agreements. We can only hope that, at that stage, our political system would function as effectively as that of France or Germany when they decided to create an economic community.
However one envisages the shape of future trade relations among the developed countries, the smell of trouble for the less-developed countries is fairly strong. Europe may be organized around the European Free Trade Area and the European Economic Community or around a new arrangement which embraces both; or the United States may be associated in an even wider arrangement among the developed countries. In either case, unless the implications of these arrangements for trade with the underdeveloped areas are fully considered, these areas may suffer great loss.
There are two segments in the trade of the underdeveloped countries which are especially likely to be sensitive to the creation of economic unions among the developed nations. One of these is trade in manufactured products of a certain type--those based on a comparatively simple, self-contained technology, involving a significant labor cost content and requiring comparatively low transport costs when shipped across international boundaries. Textiles are the classic example of such products. Transistors are a latter-day illustration. It seems inevitable that products which will fill this bill of specifications should be produced in swiftly growing volumes in underdeveloped areas. The costs of transmitting technology across national boundaries are declining rapidly--especially as travel time for key executives is reduced and as better communication makes them constantly accessible to the home office. The costs of transmitting products across national boundaries are also falling swiftly as delivery becomes swifter and more certain; these are critically important factors in the purchase of products for assembly or the purchase of products for consumer merchandising.
The other type of product in which the underdeveloped country has an export potential is, of course, raw materials in either their pristine state or in some form of early fabrication. Advanced countries not uncommonly are also major producers of raw materials; what one of them does not produce, another may. A customs union or other preferential arrangement among them could squeeze underdeveloped areas out of their accustomed markets.
Assuming--as we are doing here--that it is critically important not to impede the development of the laggard areas of the world, we are obliged to tailor the trade agreements among the developed nations to fit our objectives vis-à-vis the underdeveloped countries. The policy of the industrialized West must be that of granting unilateral concessions to these countries in order to keep our markets open to their products.
Once again, we are obliged to ask if we dare pursue this policy in light of our balance-of-payments position. And once again the answer is that the balance-of-payments problem need not represent a deterrent. When underdeveloped countries are offered a chance to sell more goods, their inevitable response is to buy more goods--not to hoard gold or to build up overseas balances. Their import wants are so great that they cannot fail to bring their imports up to exports in a very short order. At the same time, however, the expanded export opportunities offered to these countries are best provided by all the developed nations in concert, not by the United States alone.
Our trade policy toward the underdeveloped countries must do more, however. Through all the haze of embattled statistics, the fact remains that the instability of raw material prices and export earnings constitutes a major obstacle to the sustained development of many of the less advanced countries. A perennial answer to the problem has been commodity agreements of one sort or another. But commodity agreements are notoriously difficult to negotiate. Once negotiated, they typically accomplish less than was hoped for. To a degree and for a time, they may muffle the fluctuations of prices. But when the demand for industrial raw materials falls off or the supply of agricultural products suddenly changes through natural causes, export proceeds inevitably suffer. And when agreements go wrong and seek to impose too high a price on the consumer, as they so commonly do, substitutes swiftly develop or new sources of supply come in. The result is often an irreversible setback for the producers of the product.
We must, of course, continue to study the possibility of reaching agreements to stabilize commodities. But we know enough already to suspect that they will carry us only so far. As a supplement, therefore, we must consider how best to stabilize the supply of foreign currencies of the countries concerned. In theory, the International Monetary Fund can do this; indeed, if pressed, its officials would insist that they do this already. In point of fact, however, no raw-material exporting country can lay its future plans upon the assumption that the I.M.F. will help make up any deficit generated by year-to-year changes in raw material prices or supplies. I.M.F. extensions of credit are commonly hedged about with conditions which countries vulnerable to the rawmaterial problem find it most difficult to meet--the requirement, for instance, that steps to balance budgets and curtail foreign exchange expenditures must be instituted concurrently with the grant of assistance. So countries may be forced to curtail their imports of fertilizer or their expenditures on irrigation as a condition precedent to I.M.F. aid.
Conditions of one sort or another will always be indispensable to a credit-granting institution. But the conditions imposed by the I.M.F., seen through the eyes of the outside observer, have run too much in the tradition of the banker and too little in the tradition of the entrepreneur. They have too easily subordinated the objectives of growth to those of stability. There are times, of course, when stability of some sort is a prerequisite to growth. But there are times, too, when growth is the instrument through which balance is eventually achieved.
Finally, we need to participate more actively and constructively in the development of regional trade arrangements among the underdeveloped nations. The nature of our participation should be shaped by the recognition of two or three hard facts. One is the pervasive role of monopoly or oligopoly in the modern sector of most of these countries, a situation which runs from the granting of credit through to the marketing of products. The other is the insufficiency of individual national markets to support many types of modern industry or to encourage the various specializations so necessary for increased output.
Regional trade arrangements do not automatically solve this sort of problem. On the contrary, they can be used to extend the scope of existing monopolies; they can force some member countries to shift from efficient outside sources for some of their critical products to inefficient inside sources; and they can spread stagnation a little further by creating tight little communities of nations insulated from the effects of outside competition. One can say of these regional trade arrangements, therefore, only that they offer an opportunity for the speed-up of growth, but not an assurance that the speed-up will occur. If in their development they offer wider markets, more opportunities for specialization, more diversified sources of credit and a multiplication in sources of supply, the growth objective will be closer at hand. The influence of the United States should be used to ensure that the arrangements work in that direction.
So far we have been looking at the trade relations of the United States with countries outside the Soviet bloc. What is more, we have been assuming--while well aware of the rashness of that assumption--that the countries concerned conduct their foreign trade more or less on a pattern followed by the United States, a pattern in which individual consumers and traders determine the flow of goods across national boundaries. What about our trade relations with the state-trading countries of the world--particularly those which comprise the Soviet bloc?
This is not altogether a new question for the United States, but it presses for a reply today with heightened urgency. Though the United States groped for a solution from time to time in the prewar period, it never really found more than half a solution. Then in the postwar period the problem arose again; but at first it took a form which could easily be handled. In some cases, such as those of Britain and France, state trading was confined to just a few commodities, representing an exception to a general rule. In these cases, the United States sought to apply rules analogous to those which would apply in private trade: the import mark-ups of state-trading entities were thought of as analogous to tariffs, hence negotiable between the selling and the buying countries; the selection of supply sources by the state-trading entities was deemed analogous to the application of rules against discrimination, hence subject to scrutiny and complaint; and so on.
But the problem of dealing with economies fully committed to state direction within and to state trading without posed a very different set of issues. Here, "price," "mark-up" and "discrimination" acquired totally different meanings and all the analogies with private trading began to crumble. Since our political relations with practically all such countries were crumbling as well, there was no real need to face the issue. The United States allowed only a trickle of trade to take place with such countries, over the barriers imposed by our Export Control Act. And under the statutory mandate of the Battle Act we tried to persuade other friendly countries to pursue parallel policies, using the leverage of our foreign aid programs wherever we could.
Today, it is clear that other friendly countries have every intention of expanding their trade with state-directed and state-trading economies such as those of the Soviet bloc, in spite of the feeble United States pressures still being exerted on them. There is reason, therefore, to turn back to this baffling problem of trade between state-directed and free-enterprise economies. Moreover, the desire to find a solution by now seems fairly widespread. Discussions in the Economic Commission for Europe and in the GATT over the past two or three years indicate that many other countries, some of one type, some of the other, would like to find a better means for handling such trade.
The first step for the United States ought to be that of clearing its statutory decks for constructive action. While there is not the space here to debate the point in detail, it seems reasonably clear that the approach pursued in our Export Control Act and in our Battle Act is almost a dead letter. In administering these acts, the United States has assumed that trade with the Soviet bloc in a broadly defined range of products is inevitably harmful, on balance, to our side and that the denial of these products to the Soviet bloc contributes to our security. Two things begin to be distressingly clear, however. In the prevailing mood of the world today, an effective system of denial of industrial goods no longer is possible; there are too many uncontrollable sources from which such goods can come. Besides, there is grave doubt if denial would make much sense even if it could be achieved; the outcome of modern warfare surely is not affected to any extent by holding down the supply of industrial goods to the Soviet bloc. Accordingly, the Export Control Act and the Battle Act should be used only for the control of arms, ammunition and implements of war in trade with the Soviet bloc, not for that broad range of industrial products to which we now attempt to apply it.
Once we have put the security objective in proper perspective, we ought to be clear as to our objectives in attempting to develop a modus vivendi for trade with state-trading economies. Two objectives in particular seem important. First, we want to protect our multilateral system, with its emphasis on nondiscrimination, declining trade barriers and maximum choice, from the corrosive and debilitating effects which are generated when any country in the system tries to accommodate itself to the bilateral, discriminatory patterns of the state trader; that is, we want to check the use of quotas, inconvertible currencies and discriminatory pricing which are the usual stock-in-trade of a state trading entity. Second, we want to be sure that the state trader cannot exploit his monopoly power to such an extent that he walks off with the bulk of the gains from trade.
In order to develop such a system, we need the coöperation of other countries. To get that coöperation, we must make it crystal clear that our objectives are not a part of cold-war military or political strategy--at least not in the usual sense. The amendment of the Battle Act should go some distance in that direction. But to make the point clearer still and to give the President the necessary powers to develop a modus vivendi, it would also be useful to amend the Trade Agreements Act so that the President was authorized in his discretion to suspend the provisions requiring trade discrimination against the Soviet bloc.
With these powers in hand, the President could aggressively try to develop reasonable trade relations with the bloc. In all likelihood, he would have to move on two fronts. He would need to learn what ground rules our friends are prepared to accept as a basis for such trade; and he would have to try to learn the enigmatic intentions and desires of the Soviet bloc in the trade field. As far as our friends were concerned, those with convertible currencies and open trading systems might be expected to agree that they would avoid the use of discriminatory trade measures favoring the Soviet bloc, including the use of clearing accounts, import licensing systems which reserved some share of the domestic market to Soviet products, and so on; that they would consult on problems of serious market disruption generated by Soviet pricing practices; and that they would try to develop joint counter-moves with us in cases in which the Soviet bloc was using the threat to cut off its trade or the promise to expand it as a means of political penetration of some friendly country.
What the Soviet bloc might agree to as appropriate rules of the game in the trade field is much less clear. In contacts with Soviet representatives on trade matters thus far, one gets the disconcerting sense that an enormously wide gulf exists in the communication of basic points of view on the subject. Any system in which governments guarantee neither markets nor sources of supply is one which the Soviet side seems to have genuine difficulties in comprehending. Whether they understand the system or not, Soviet trade representatives seem to find it hard to believe that governments cannot really reassert a directive role over their trade if they choose; the question, as the Soviet side sees it, is whether they choose. The chances of developing an early modus vivendi with the Soviet bloc, therefore, does not seem high. But it may not be too early to launch the long process of communication which must precede an agreement.
A common thread runs through all these proposals, coloring our suggestions regarding trade with Western Europe, trade with the underdeveloped nations and trade with the Soviet bloc. As a nation, we have been of two minds. We have had no real doubts where our destiny was pushing us--toward greater and greater economic and political involvement with the rest of the world. Yet, from time to time, we have cast a wistful look back to the times when economic and political isolation were available as a real alternative. We have punctuated our bold moves of engagement with incongruous counter-moves of disengagement; we have reduced our tariffs while imposing import quotas on products like lead, zinc and oil; we have increased our aid while enlarging the conditions on its use which would protect our agriculture and our textile industry. As a result, we appear the reluctant dragon--powerful yet afraid. What we have to shed is fear--fear of the loss of foreign exchange, fear of the ability of our domestic industry to respond to its opportunities and its problems, fear of the tactics of the Soviet trader. If economic engagement is a battle, then the battle is inevitable. And we had best be getting on with it.