WHAT TO DO ABOUT TRADE POLICY A few helpful hints for Ambassador Carla Hills: Don't try to devalue the dollar, do take a new look at dumping laws, and do retaliate -- but only when necessary.
By Ann Reilly Dowd REPORTER ASSOCIATE J. B. Blank

(FORTUNE Magazine) – NOW MORE THAN EVER the U.S. needs some clear thinking about trade. As Europe steams toward economic unification in 1992, American businessmen worry about higher tariff walls. Japan is continuing to expand its awesome commercial clout, while other Asian countries, particularly South Korea, are also generating big trading surpluses with the U.S. Meanwhile, America's progress in reducing its trade deficit seems to have slowed. Into this worldwide drama steps Carla Hills, the new U.S. Trade Representative (USTR). Her unenviable job: to figure out how to use the 1988 trade act, which requires the USTR to take action against the worst international trade offenders, without destroying the fragile philosophy of free trade. Says she: ''We will open foreign markets with a crowbar where necessary, but with a handshake whenever possible.'' Ambassador Hills will also have to contend with the growing numbers of prominent proponents of ''managed trade,'' Washington's latest variation on the protectionist theme. Under one approach the U.S. would bargain with individual foreign governments for specific industry-by-industry import shares in order to bring trade flows into balance. A recent report by the President's Advisory Committee for Trade Policy and Negotiations, signed by American Express CEO James D. Robinson III and Corning Glass Works CEO Jamie Houghton, recommended this strategy as a way to reduce Japan's $55 billion trade surplus. But managed-trade proposals -- like tariffs, quotas, and voluntary restraint agreements (VRAs) -- are inefficient, raise prices, increase the threat of tit-for-tat protectionism, and often don't work. Consider this early experiment in managed trade: The 1986 semiconductor agreement with Japan had as one of its goals that the U.S. should control 20% of the Japanese chip market by 1991. So far the American share has inched up from 8.5% to only 10.7%. Says an economic official at Japan's embassy in Washington: ''We cannot force our companies to buy American.'' Protectionist measures are put forward in response to a perception that the / trading world is unfair. Yes, it is, but it always has been. Besides, the fixes carry their own lack of justice. They are unfair to customers who have to pay higher prices. Hills agrees: ''Open trade with enforceable rules is the way to maximize economic welfare for all nations, not managed trade.'' The real solution to the trade deficit is basic: The U.S. must bulk up its exports, reduce its imports, and pare its budget deficit. The nation is doing quite well on the export side, thank you: In the past year the value of American goods shipped overseas has risen a near record 27%. But even with a weak dollar in their pockets, Americans still lust for imports (see charts). Purging the budget deficit would chasten U.S. buying patterns. Here's how: With government spending so high and private savings so low, the U.S. must borrow abroad to maintain current rates of economic growth. That growth fires domestic demand for imports as well as American-made products. Reducing the budget deficit would cool demand, which in turn would restrain the growth of imports and free up domestic resources for export. Spurring competitiveness would also help reduce the trade deficit. That means promoting savings and investment, quality education, and domestic energy development. With oil consuming a growing share of the import bill, the U.S. should resist pressures to slow exploration. These solutions will take time. For now here are some practical do's and don'ts for trade policy.

-- Don't try to devalue the dollar. Economist Martin Feldstein and others argue that the dollar needs to decline a further 15% or so to stem imports and boost exports. But a range of businessmen say the dollar's 40% drop against a basket of currencies since 1985 has already made U.S. industry price competitive. With interest rates rising, it's unlikely that even a concerted effort by the U.S. and its trading partners could force the dollar down much. But if it could, the import-export picture would not change a lot and the inflation risk would go up.

-- Don't validate the VRAs. Under these deals foreign producers agree that they will supply only a certain percentage of the U.S. market. A number of American manufacturers love VRAs, for they mean reduced competition as well as an opportunity to raise prices (thereby providing money to invest toward competitiveness). Some foreigners are also enthusiastic. The agreements guarantee even inefficient producers a share of the world's biggest market. In / addition, the VRAs have headed off the imposition of auto and steel quotas by Congress and the filing of antidumping and unfair-subsidy suits by U.S. steelmakers. Candidate Bush promised Pennsylvania Senator John Heinz that he would renew the steel VRA, which expires September 30. But industry experts say that steel companies, which had $2 billion in profits last year, no longer need such coddling. A renewal of VRAs would mean higher prices for steel users. Since 1986, VRAs have helped push up steel prices 19% and created some severe shortages. A 1987 survey by the Center for the Study of American Business in St. Louis found that these quotas saved 17,000 steel industry jobs, but cost 52,400 jobs in other industries, such as autos, heavy machinery, and fabricated metals. At the very least George Bush should resist industry demands for a full five-year extension of steel's VRA. A one- or two-year phase-out would be plenty generous. No action is needed on motor vehicle VRAs: The Japanese build so many cars in the U.S. that they have not even met their quotas in recent years.

-- Do take a new look at the dumping laws. U.S. law prohibits dumping, the selling of a product below the price charged in its home market. But the government has been timid about enforcing the law, mostly for fear of angering allies. In the 1970s, Timken had to sue the Treasury Department to force it to carry out its own dumping order against Japanese tapered roller bearings. Zenith labored for a decade to get U.S. dumping duties assessed against Japanese TV manufacturers, and then the governments of the two countries negotiated the penalty down to 10 cents on the dollar. Three times Hitachi was charged with dumping different types of semiconductors. But by the time the cases were resolved, U.S. chipmakers say, Hitachi was dumping a whole new generation of chips. At any rate, between 1985 and 1988 the Japanese doubled their U.S. market share from 12% to 24%. Timken, Smith Corona, Zenith, and the surviving semiconductor industry claim the way the U.S. calculates dumping margins -- the difference between the home market price and the import price as a percentage of the import price -- makes it harder to prove dumping in the U.S. than in Europe. Timken lawyer Terence Stewart says this is particularly true when transactions include so-called related parties like manufacturers and their in-house distributors. In such cases the U.S., unlike most of its competitors, includes profits in its import price estimate (making that price higher) and excludes indirect selling costs in its calculation of the home market price (making that price lower). As a result dumping margins can be lower in the U.S. than in Europe. Importers counter that Timken and others are trying to use the dumping laws as protection. Stepping into the fray, Commerce Secretary Robert Mosbacher has agreed to take a new look at how dumping laws are enforced and the way dumping margins are calculated. ''Mosbacher plans to be tough,'' says Zenith Chairman Jerry Pearlman. ''This attitude represents an important change in the government's posture toward enforcing the law.''

-- Do revitalize the GATT. Though hobbled by neglect, the General Agreement on Tariffs and Trade remains the only international organization capable of policing an open world trading system. In the 1970s the Tokyo Round of trade talks produced major reductions in tariffs and quotas worldwide. The daunting challenge of the so-called Uruguay Round, which is now going on in Geneva and is scheduled to last until the end of next year, is to make the GATT relevant. Says former U.S. trade negotiator Harald Malmgren: ''Mrs. Hills's crowbar isn't big enough to pry open every market one by one. The only hope for major trade liberalization is the new GATT round.'' At the top of America's wish list is an extension of GATT jurisdiction to banking, insurance, and other fast-growing service businesses, where American firms say they are being shut out of foreign markets. Take U.S. branch banking in South Korea. After much bilateral negotiation, the Seoul government agreed to permit the practice, but only if American banks agreed to set up branches in Pusan, Korea's second-largest city. Trouble is, local Pusan officials refuse to allow bank branches, so U.S. firms are stuck in commercial limbo. GATT negotiators have recently reached a framework for negotiations on trade in services, as well as on agriculture and intellectual property protection. In December, ground rules were also established for talks on foreign investment restrictions and domestic subsidies.

-- Don't oversell bilateral free-trade agreements. Beyond America's historic treaty with Canada, new bilateral trade frontiers will be hard to conquer. The U.S.-Canadian pact focused on tariff reductions. Still, agreement came slowly and painfully, even between like-minded neighbors. It would be much more difficult to negotiate a free-trade zone with Japan, as advocated by former U.S. Ambassador Mike Mansfield, or with Mexico, as George Bush often mentioned in his campaign. Ambassador Hills figures correctly that embarking on full-fledged free-trade negotiations with individual countries would distract attention from the Uruguay Round. Still, she will continue to pursue behind-the-scenes talks, which would further bilateral understanding and give the U.S. more leverage at the GATT. Says a FORTUNE 100 CEO who advises Hills on trade: ''The thought of a U.S.-Japan free-trade zone scares the hell out of the Europeans.''

-- Do retaliate when necessary. Washington is starting to recognize that its ability to retaliate is increasingly limited. Says Robert Hormats, vice chairman of Goldman Sachs International: ''Ironically, we didn't retaliate ten years ago for fear of undermining foreign policy relationships. Now our competitors are stronger economically and able to hurt U.S. industries through counter-retaliation. So we can no longer retaliate indiscriminately. We must have clear objectives and remedies in mind.'' By law Hills is required by the end of May to identify the countries and trade practices that do the most damage to U.S. companies. Then she must start negotiations to remove these barriers. If the talks fail or if an agreement is violated, the law demands that she retaliate, possibly with tariffs, quotas, even trade bans. Experience has proved that the Japanese respond to certain threats to withhold access to the American market. They stopped dumping semiconductors into third markets only after Washington imposed retaliatory tariffs. Progress in opening up the Japanese telecommunications market was stalled until the Senate passed a unanimous resolution calling for retaliation. To its credit, Japan has eliminated many of its most obvious barriers. Average tariffs and quotas are now lower than in the U.S. During the Reagan years negotiators reduced barriers to meat, citrus, tobacco, and the four product categories covered by the market-oriented sector-selective (MOSS) talks: telecommunications equipment and services, medical equipment and pharmaceuticals, electronics, and forest products. From 1985 through 1987, exports to Japan in these four categories increased 46.5%, well above the 24.8% rise in total American exports to Japan. BUT BARRIERS still persist. Some are cultural, like consumers' preference for domestically produced goods; others are structural, such as Japan's inefficient mom-and-pop distribution system; still others are rooted in industrial policies that protect such advanced technologies as supercomputers, biotechnology, and the commercialization of space. U.S. companies want their government to forget trying to change the Japanese culture or unseat powerful domestic lobbies like the rice producers and to focus on access to competitive, big-ticket industries: biotech, supercomputers, and telecommunications. To gain access for American companies in Japan, Washington could limit entry of Japanese companies to the U.S. market. The threat of retaliation works even better with South Korea and Taiwan because they are more dependent on the American market than are the Japanese. Almost 40% of Taiwan's exports and 32% of Korea's go to the U.S. Pressured by Washington, both countries have revalued their currencies somewhat and eliminated some trade barriers. Both have enacted new intellectual property protections, which still need tougher enforcement, and have removed barriers to American cigarettes. Says Peter Allgeier of the USTR's office: ''The Koreans and Taiwanese have less of a cultural bias against foreign goods than the Japanese. So once barriers are removed, U.S. companies don't face the same consumer resistance they do in Japan.'' American cigarettes grabbed 16% of the Taiwanese market a year and a half after trade barriers were lifted. Still, Korea and Taiwan have a long way to go. Under the new trade law, both have been charged with manipulating their currencies, and Korea with keeping its market closed to U.S. telecommunications equipment and services. Both also need to ease foreign investment limits, reduce barriers to farm imports, and lower tariffs and import licensing requirements. Ambassador Hills may put these countries on her bad-guy list. Europe has already felt the blast of American retaliation. When the European Community adopted regulations banning hormone-treated beef, the U.S. imposed 100% tariffs on $100 million worth of European imports, from spirits to tomato sauce. Says American Express Chairman Robinson: ''We won't succeed in keeping European markets open without continuous message sending.'' Expect an incendiary missive if Europe tries to block the sale of American- made cars in Europe, including those manufactured by Japanese-owned plants in the U.S. Hills has put the EC on notice that such limits would be cause for action. Then there's Brazil. South America's mercantilist giant heavily subsidizes domestic industries, routinely disregards intellectual property rights, and imposes stiff tariffs, quotas, and licensing requirements on imports. About 90% of all requests for capital goods imports are denied. Foreigners can make direct investments only in the manufacture of products for export. Retaliation against Brazil has had mixed results. Brazil refused to stop pirating U.S. patented drugs even though Washington levied nearly $40 million in extra duties on its drug, paper, and consumer electronics imports. However, retaliatory threats did win some access and copyright protection for U.S. software manufacturers. Retaliation is a powerful weapon that must be used only selectively and deftly lest it backfire. The 1988 trade law endorses using this weapon when negotiations fail, and it looks as if Ambassador Hills will deploy it. As Deutsche Bank economist Norbert Walter says: ''The U.S. can no longer be the friendly old daddy stating principles but never sanctioning the guys who do not behave well. It must make clear to the world that it will retaliate when its principles are ignored.''