The coming of the Clinton administration has signaled a U-turn in the way the American government thinks about foreign trade and deals with its trading partners.
Gone is the theology of free trade that stood as holy economic writ for every postwar administration. Gone, too, is condemnation of any government intervention in trade as “protectionist” and the excommunication by orthodox economists of anyone suspected of protectionism.
In their place is a new, more nuanced doctrine that rejects free trade and protectionism as false and unattainable opposites. This doctrine sees trade policy as a natural part of any U.S. economic policy. It believes that government action is both sensible and necessary when-as in most high-tech trade-free markets just don’t work.
As with many issues, from health to Russia, the approach by the president and his aides is more of a framework of beliefs than a crafted policy. But these beliefs already have led to a number of tough actions that sent shock waves through Europe and Japan, which aren’t used to an American big stick on trade.
At the moment, the administration seems inclined toward tit-for-tat retaliation against perceived trade restrictions in Europe, where markets are generally open and the United States runs a trade surplus.
But Japanese markets are all but closed to many American goods and most investment, and the U.S. trade deficit is perennial and growing.
Toward Japan, administration officials talk about a “results-based” policy. This means the United States will insist on a certain share of Japanese markets for its goods and will go for “reciprocity”-will close American markets to Japanese exports-if they don’t get it.
The catch phrase is “market access,” which means forcing other nations to open their markets to U.S. goods. With its implicit threat to choke off American markets, it is a high-risk policy. But its advocates insist it will expand trade in the long run.
As proof, they point to a deal in which the Reagan administration, in its one foray into a results-based policy, forced Japan to agree to raise the Japanese market share for America’s highly competitive computer chips, then 8 percent, to 20 percent by 1992. The administration announced Friday that this goal was met in the last quarter of 1992.
“Free trade is conditional,” said Robert Kuttner, the economist and columnist whose ideas have influenced Clinton and his aides. “Access to our market should go to those who play by the rules.”
Free-trade advocates, who reached their peak of power in the Reagan administration, argued that free trade was such a virtue that anything the United States did to promote it benefited Americans in the long run, no matter what other nations did.
The Clintonites and their academic support troops say this thinking led to a decade of trade deficits, job losses, manufacturing flight and Japanese supremacy in the industries of the future.
Their instinctive reaction to trade issues is, “What’s in it for us?”
“I think free-trade-versus-protectionism is a dichotomy that’s a barrier to policy, not a help,” Laura D’Andrea Tyson, the head of Clinton’s Council of Economic Advisers, told a trade conference here last week.
“In technical markets, the (free) market often isn’t there,” Tyson told the conference, sponsored by the Economic Strategy Institute (ESI). “Free trade is not often a choice open to you. Your choice gets messier, and you have to have a policy.”
In place of a policy, there have been a series of actions that have trade negotiators in Europe and Japan steaming.
The president himself has offered help to American aircraft and high-technology manufacturers in their battles for world markets.
The administration is threatening to bar companies in the European Community from bidding on some U.S. federal government contracts, in retaliation for similar barriers in Europe.
Clinton’s aides have said they want the Japanese, having finally opened 20 percent of their computer-chip market to American imports, to keep this level. They threaten to strong-arm Japan into accepting similar quotas on other imports.
Clinton ignored pressure from free-traders to get a quick agreement at the Uruguay Round of world trade talks in Geneva. Instead, he let a crucial March 1 deadline pass and his aides are calling into question the deals already set in seven years of talks.
Meanwhile, the North American Free Trade Agreement (NAFTA) talks have reopened, with little consensus on what the United States wants.
The World Bank and other international bodies say the American market is more open than the European and Japanese markets. Nevertheless, officials in Brussels and Tokyo are accusing the new administration of protectionism. No trade wars loom, but the gentlemanly era of postwar trade negotiations is over.
As with so much else, the abrupt changes in American trade policy under Clinton have twin roots-the end of the Cold War and the arrival of a generation of leaders whose view of the world was shaped not in the 1940s and ’50s but in the ’60s and ’70s.
During the Cold War, the political and military struggle with the Soviet Union was all-important, and international economics often was ignored.
Now the Cold War is over and the famous Clinton campaign sign-“It’s the economy, stupid”-has become both the cliche and the watchword in Washington. With the Soviet Union gone, Japan and Europe have become America’s chief rivals, and trade has become the weapon.
“We’ve shifted from the geopolitical priorities of the past to the economic priorities of the future,” Tyson said. “In competition with Europe and Japan, we need an active trade policy.”
In addition, Clinton’s predecessors came to political maturity in a world where the United States was the only real economic power. In the postwar years, the United States deliberately kept its currency overvalued and its markets open, while tolerating closed markets abroad, especially in Japan. The idea was to use the power of the U.S. market to help America’s allies recover.
The plan worked beautifully and gave free trade an aura of sanctity, even though it was a one-sided free trade, with only U.S. markets truly open.
At the same time, a series of world trade rounds, under the General Agreement on Tariffs and Trade (GATT), slashed tariffs. Trade boomed. So did the Western and Japanese economies, leading economists to assume that the trade boom caused the economic boom.
But by the ’60s and ’70s, Japan and Europe had recovered and were challenging America for world markets. Old proteges became rivals.
By the 1980s, the United States was running trade deficits, Japan was seizing American markets, U.S. steel and auto workers found themselves unemployed and trade was a political issue.
Despite their computer-chip deal with Japan and occasional actions to protect the American auto and steel industries, the Reagan and Bush administrations preached free trade. Indeed, their mandate for the Uruguay Round talks didn’t even deal with the kind of barriers that have caused so much friction with Japan.
But through the ’80s, a disillusioned group of politicians and academics, convinced that free trade wasn’t working, began framing a new trade theology. They included Kuttner, Tyson, ESI President Clyde Prestowitz, new Deputy Undersecretary for Commerce Derek Shearer, University of California professor Chalmers Johnson, Harvard professor George Lodge and other academics, plus politicians like Rep. Richard Gephardt (D-Mo.).
Some, like Shearer, were FOBs (Friends of Bill). The rest were plugged into the movement, centered on Clinton, to modernize the Democratic Party.
The death of free trade, like the advent of Reaganomics 12 years earlier, burst on an unsuspecting nation. But like trickle-down economics, the new Democratic trade thinking had been rehearsed and honed in academic journals and seminars for a decade, just waiting for a leader to put it into practice.
The new trade orthodoxy was on show at the ESI conference. Free traders like economists Herbert Stein and Jagdish Bhagwati, who would have dominated a similar forum two years ago, were a minority fringe. It was a sign of the changing times that even former trade officials in the Reagan-Bush administrations, such as Paula Stern and Robert E. Lighthizer, called for tough action on Japan.
“It’s the Japanese, stupid,” Lighthizer quipped.
“We don’t have a trade problem-we have a problem with Japan and with China and Taiwan,” he said, citing statistics that two-thirds of the U.S. merchandise trade deficit of $100 billion is with those three Asian countries. “We should use market access as a weapon.”
The new theorists reject economic isolationism, arguing that American protectionism in an interdependent world isn’t possible.
“Free trade doesn’t work, but protectionism is no answer,” said Kevin Phillips, political analyst and author of “The Boiling Point.”
The new theorists squabble among themselves. But all would agree with Tyson, who has written that “the traditional approaches to trade and domestic policy that served the nation so well when American companies had an unrivaled technological lead are no longer adequate.”
In particular, she said, most high-tech industries, being based on a tight alliance between government and business, “violate the assumptions of free-trade theory.” Because of this, “free trade is not necessarily and automatically the best policy.”
Some speakers at the conference argued that a collapse of the Uruguay Round talks, which began in another era before Communism crumbled, would be no tragedy.
Most others wanted a GATT agreement but, like Tyson, said the old U.S. reliance on the multinational GATT approach is outdated. They said that some trade problems are better faced regionally, through NAFTA, and others-like disputes with Japan-can only be handled bilaterally.
Few seemed upset by the fact that this layered approach weakens GATT as the primary trade forum.
Kuttner called for world talks that, instead of treating government subsidies as sins, would set global standards for such subsidies, and would actively encourage subsidized training and research.
The new hard line toward Japan and the general acceptance that much of Japan’s success is based on that nation’s closed market was exemplified by C. Fred Bergsten, whose Institute for International Economics is partly funded with Japanese money and has traditionally defended Japanese policy.
“In 1985, the United States had a big trade deficit but every other country had a surplus,” Bergsten said. “This was an American problem.
“Now Japan has a big surplus while everybody else has a deficit. The Japanese surplus sticks out like a sore thumb. It’s a Japanese problem, and they have to solve it.”
Bergsten called for a multipronged U.S. trade policy, including demands that Germany and Japan stimulate their economies, export credits to American exporters and tough trade negotiations to open other nations’ markets.
