Spoiling the Wine-Cheese Party Won’t Treat Real Trade Problems

Ronald Reagan’s decision to triple the price of cheese and white wine imported from Europe looks like an unconscionable assault on the yuppie values within one of his biggest and most dedicated voting blocs.

Make no mistake about it. Reagan’s tariff decision is grenade-throwing stuff. A jug of Italian white wine, that staple of fledgling investment bankers and the rest of the ladder-climbing set, will jump from about $5 a bottle to $15. A party-size wheel of Gouda cheese could go as high as $30. Similar tariffs will apply to a range of champagnes and brandies, dampening the party-going spirit everywhere.

Clearly, Reagan needs to show that he is not a wimp on trade. The new Democrat-controlled Congress has protectionist trade legislation at the top of its agenda. The big November trade deficit, at $19.2 billion after several months of slow improvement, has increased pressure for some kind of dramatic action. Reagan barely kept the free-trade coalition together during his first six years in office, executing a slow, grim retreat. All Presidents are lame ducks at the end of a second term, even without helping hands from ayatollahs. It will be hard to keep Republicans from bolting on trade votes unless the Administration’s position looks both tough and credible.

It is not yet certain that the new tariffs will take effect. They are scheduled to start at the end of the month, but the announcement contained a broad hint that negotiations would be welcome. The Administration is more interested in concentrating European minds than prohibiting cheap foreign bubbly. But the complexity of the problems underlying the tariff action testify to the enormous difficulties of dealing with the U.S. “trade problem.”

The wine and cheese tariffs were prompted by a European attempt to shelter bulging agricultural surpluses. As a condition for entry into the European Economic Community, Spain had to adopt the EEC protective tariffs against U.S. grain sales, costing American farmers some $400 million in annual exports.

The EEC has agricultural surpluses for the same reason that the United States does. Throughout the 1970s, underdeveloped countries, including the Soviet Union, discouraged food production and encouraged consumption by keeping food prices artificially low--the same policies that helped cause the oil shortage in the United States at about the same time. Since they could not get fair crop prices, farmers throughout the Third World fled to the cities, and their governments gradually went bankrupt as they imported food for the unruly urban mobs their farmers had turned into. Food aid from the West usually made things worse by further distorting local farm prices.

Perverse Third World food policies allowed the United States to become the Saudi Arabia of food, with European and Australian farmers playing the role of Qatar and Abu Dhabi. But over the past decade, partly because of the international credit crunch, developing countries have been ending subsidies and allowing food prices to rise. Miraculously, farmers are returning to the land, and food production is increasing.

The Organization of Petroleum Exporting Countries at least had the common sense to deal with the oil glut by trying to cut production. Not so wisely, almost all the big food exporters are spending taxpayers’ money to keep farmers producing food nobody wants. In the United States, direct farm support payments jumped tenfold, to more than $25 billion, between 1980 and 1986. Agricultural subsidies in Europe have driven the EEC to the brink of bankruptcy. The nastiness of the Spanish grain tariff and the Reagan riposte bespeak desperation.

But trade is a side issue in the agricultural wars. Whatever the outcome of the tariff battles, the immense imbalance in supply and demand for food will remain until governments allow market forces to restore some reasonable order, however many farm-belt votes it costs.

Most issues lumped together as “trade policy” problems have roots as deep and tangled as the food skirmishes. Probably few congressional protectionists realize that the loss of U.S. exports to Brazil and Mexico has had more effect on the U.S. trade balance than increased imports from Japan. Exports to Latin America were financed primarily by U.S. banks flush with oil funds. When both the banks and their borrowers became overextended, the exports dried up.

The American taste for Japanese cars has little to do with restrictive trade practices. Most attempts at estimating the value of Japanese and U.S. trade quotas, tariffs and other restrictive practices conclude, in fact, that each country is about equally protectionist. The poor performance of U.S. automobile companies is the result of shoddy management and coddled unions, not Japanese price-cutting or an undervalued yen.

But even with assistance from U.S. management, Japanese companies would not have been able to export so freely to the United States if they had not been prepared to finance their own trade, as the United States did with Brazil.

It is hardly surprising that Japan, running national surpluses in the 3%-4% range for some years, should be exporting capital and goods to the United States, running national deficits in the 3%-4% range. That rather fortuitous matching of policy has allowed both countries to avoid recessions while most of the rest of the world has been sunk in economic gloom.

It is Pollyanna-ish, but probably true, that the U.S.-Japanese trade imbalance will correct itself if neither country does anything. The recent swing in relative yen-dollar values makes it expensive for the Japanese to export to the United States. As U.S. companies were forced to do 30 years ago, Japanese companies will follow markets and move production out of Japan. Big European and U.S. companies produce some 15%-20% of their goods overseas, Japanese giants only 3%. Every Japanese automobile factory in the hills of Tennessee reduces the trade balance that much further.

Protectionism can make trade battles nastier in the short run, but can’t hold back long-term flows in the economic tides. Severe imbalances are usually self-correcting, however painful the process. Flailing at symptoms will occupy politicians at the cost of minor increases in inflation. Perhaps, given all the damage politicians are capable of, we should be grateful for such small blessings.

DR, RICHARD MILHOLLAND / for The Times