Free Trade: The U.S. Shouldn't Play Purist

Nothing annoys U.S. Trade Representative Carla A. Hills quite so much as the suggestion that she thinks governments should play a role in carving up global markets. She once yelled at a group of startled reporters: "Is there anyone here who believes that I favor managed trade?" That morning, a newspaper headline had implied exactly that.

While Hills's comments are usually more polished, her outburst did reflect the Bush Administration line: "We're all free traders here." That commitment to free and open markets everywhere, while sincere, is honored more in the breach than in observance: As citizens of the real world, President Bush's trade negotiators know they can't always abide by Adam Smith.

REALPOLITIK. The fact is, most governments, including Washington, meddle in global commerce in a hundred different ways. The latest U.S. plunge into managed trade came on May 18, when Detroit's Big Three met, with the Administration's blessing, behind closed doors in Chicago with Japan's Big Five carmakers. Officially, car moguls were discussing the sale of more U.S. cars in Japan and the increased purchase of U.S.-made parts by Japanese transplants. But it's hard to believe that they didn't also discuss the proper Japanese share of the U.S. car market.

The Administration's talk of free trade isn't mere lip service. The U.S. has led the world through 50 years of international trade talks that reduced tariffs tenfold. But "when there is enough political pressure, we deviate from our rule of 'follow the marketplace' and we cut a deal," notes American University economist Stephen D. Cohen. For example, Bush got Tokyo to agree to limit exports by its subsidized steel industry to the U.S.

Managed trade can also chip away at other countries' stubborn protectionism. Japan is notorious for shutting out foreign semiconductors, despite its agreement, hammered out with the Bush and Reagan Administrations, to reserve a 20% share of its market for foreign chips. How to get Tokyo to stick to its deal? Managed trade. Even Hills thinks so: On May 27, she chided Japan and called for a U.S. review of the semiconductor agreement.

Sometimes, simple common sense demands managed trade. International landing rights at U.S. airports are negotiated on a reciprocal basis with competing nations. Otherwise, chaos would result, as dozens of foreign airlines--many government-owned, please note--would flood the U.S. with cut-rate flights, while denying access at home to Delta, United, or Northwest.

Consumers are rightly suspicious of managed trade. But it does have its place--particularly when foreign industrial policy threatens competitive U.S. industries. Take the massive European subsidies to aircraft maker Airbus Industrie. For all its lectures to Britain, France, Germany, and Spain about the wonders of free trade, the Bush Administration could do little to slow the Airbus juggernaut, which recently overtook McDonnell-Douglas Corp. as No. 2, after Boeing Co., in sales.

RECIPROCITY. Purists want the U.S. to stand as an unwavering preacher of the free-trade gospel. Trouble is, that was easier to do when America dominated the global economy. When the airlines of every nation seemed to consist of Boeing and Douglas jets, Washington could pretend that there was a free market in aircraft. Alas, that's no longer possible. "The question is not if there will be managed trade, but will it only be in Brussels and Tokyo and not Washington," says Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, a Washington think tank. To counter the Airbus threat, Washington may have to offer Boeing's customers the same kind of cut-rate financing that Airbus gives its buyers.

An effective and flexible trade policy can be based on reciprocity and still be fair-minded. Brazil and India, where foreign investment faces near-insuperable barriers, shouldn't expect unfettered access to the U.S. market. Thailand and the European Community, among others, wrap imports in layers of red tape. They should face similar treatment from the U.S. unless they reform. The U.S. can neutralize direct government aid to foreign industries by giving American companies favorable financing from the U.S. Export-Import Bank or by imposing countervailing duties on offending imports.

It's not yet time to throw out the economic textbooks. Free trade remains the ideal. But when foreign governments handpick industries for development, subsidies, or home-market protection, it's time to get practical. As a former Justice Dept. antitrust lawyer, Hills must hate the idea of assigning market shares. But until all trading nations adopt the Golden Rule, managed trade remains a necessary evil.

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