Why Clinton Can't Have Free Trade And Higher Taxes

Is the Clinton Administration for free trade or managed trade? At the Group of Seven economic summit held July 7-9 in Tokyo, President Clinton pursued both. But the multilateral General Agreement on Tariffs & Trade does not jibe with a bilateral U.S.-Japan deal that would favor U.S. products in Japanese markets.

Lacking a bilateral agreement at the conclusion of the summit, President Clinton used his news conference to stress a GATT breakthrough that, "if finally concluded," would spur job growth in the global economy. But this news was soon eclipsed when Japan's ruling Liberal Democratic Party decided hours before Clinton's departure that its political future depends on its ability to manage the U.S. "relationship" and agreed to negotiate a bilateral agreement.

Of course, no accord has been reached--just a disputed framework that could lead to an agreement sometime in the future. But the rapidity with which the postsummit U.S.-Japan trade "pact" became Clinton's big news is indicative of his Administration's proclivity for a government-managed economy. The Japanese, by their resistance, and the U.S., by its insistence, have made it clear that the Clinton team is after managed trade, with specified numerical shares of Japanese markets as a way of reducing the U.S. trade deficit with Japan. Ambiguous wording in the "agreement to agree" permits the Japanese to claim that no quantitative targets will be forthcoming--while allowing the U.S. to claim that "objective criteria" have been set to evaluate U.S. success in penetrating Japanese markets.

Pressure on Japan to open its economy is legitimate, but Clinton is undermining a free-trade agreement by negotiating privileged access to Japan's markets. How can Clinton make a compelling case for GATT or the North American Free Trade Agreement when he places so much stress on curing a specific trade imbalance with Japan? As Japanese Prime Minister Kiichi Miyazawa told Clinton, free trade means imbalances between countries in imports and exports.

COST BARRIER. The worst summit mistake was the failure to realize that macroeconomic policy can be as effective in closing markets as tariffs, quotas, and a uniquely Japanese cultural refusal to buy foreign goods. Witness Clinton's inconsistency as he pressures Japan to open its markets while he is in the process of limiting ours to the Japanese--and everyone else--by raising taxes. With less disposable income in consumers' pockets, the demand for imports will fall, as will the demand for domestically produced goods. Recession restricts trade, and rising unemployment stirs xenophobic responses to imports, prompting politicians to turn to trade restrictions as a way of protecting domestic jobs.

Clinton's tax increase is likely to wreck the prospects for GATT and NAFTA. In recessionary Europe, the Organization for Economic Cooperation & Development forecasts that unemployment will reach 12% next year. Japan is suffering the consequences of a wrenching asset deflation that has impaired many balance sheets. The U.S. economy has not yet recovered from the 1990 tax increase. Clinton has decided to treat this economic sluggishness by bleeding the world economy with what even many Democrats recognize as a contractionary fiscal policy.

"PROTECTIONIST PARTY"? Senator Jim Sasser (D-Tenn.) complains that "we are doing the same thing we did in 1990." Senator Paul Sarbanes (D-Md.) shares Sasser's concerns "of falling back into recession as a result of the very restrictive fiscal policy we are about to adopt." Senator Frank Lautenberg (D-N.J.) recently told President Clinton: "I cannot throw my constituents in the state of New Jersey overboard to keep this [tax increase] afloat."

Senator Daniel P. Moynihan (D-N.Y.) recently acknowledged: "Our party has become a protectionist party." A protectionist party that throws the country into recession with a tax increase will be quick to divert attention to imports as the explanation for mounting job losses. It is difficult to imagine a more inopportune development for Latin America, Eastern Europe, Russia, and China--all struggling to recover from decades of socialism and managed trade and all in need of access to world markets. For the sake of improbable deficit reduction, Clinton is throwing away their chances to build successful socioeconomic systems based on capitalism.

If higher taxes spurred the economy, the deficit would not have doubled under President Bush. Clinton claims that economic benefits will flow from a higher tax burden. Yet his Administration has already reduced its real economic growth forecast for 1993 by 0.6%, from 3.1% to 2.5%, before any tax increases have taken effect. Using the Administration's budget rules, this reduction in growth raises the budget deficit by $65 billion over the 1993-98 period. If the growth slowdown continues beyond 1993, the cumulative increase in the deficit will be $208 billion.

Clinton's tax hike will shrink growth by far more than 0.6%, and the rise in the deficit will match the rise in unemployment, protectionism, and political turmoil.