Attack on Trade Surpluses Augurs a Poorer World

Foreign financial leaders, already concerned with the growing protectionist sentiment in the United States, will find further evidence near at hand as they gather in Washington for the annual meetings of the International Monetary Fund and the World Bank. A congressional conference committee is working on a trade bill that could be a serious setback to world trade and to American exports.

The committee’s highest priority should be to eliminate two key provisions. One provision would use bilateral trade imbalances between the United States and individual trading partners to trigger protectionist actions. The other provision would guarantee trade protection to industries even when there have been no unfair trade practices.

The history of this legislation helps to explain why it is so overloaded with protectionist provisions. A year ago it looked as if a trade bill would intentionally be drafted to guarantee a presidential veto, thereby allowing the Democrats to make trade an issue for the 1988 election. With that veto in mind, members of Congress could draft and vote for protectionist legislation to benefit their constituent industries, secure in the thought that the legislation would never become law.

But now that the real trade deficit is down 20% from its peak and continuing to fall, the strategy has changed. The current congressional aim is to produce a trade bill that the President can sign. Most of the worst special provisions will therefore have to be dropped. But there is still a serious risk that the bill that emerges will bring a sharp turn toward protectionism.

In a complete departure from current trade practice, the proposed legislation would single out countries that have persistent large trade surpluses with the United States for special tariffs and quotas. To increase legislative support for this horrendous idea, the most likely version would allow the President to disregard this rule if he makes an explicit finding that the protection would be against the national interest. But the obvious political costs in making such a declaration make it clear that a bilateral imbalance trigger would be a dangerous piece of legislation.

Bilateral trade surpluses and deficits that last for years are a natural characteristic of an international free market. Although the dollar’s rise since 1980 has created a trade deficit between the United States and its trading partners, during the 1970s the United States ran persistent surpluses with many European and Latin American countries and used those surpluses to finance oil imports and to make investments around the world. Any attempt to eliminate persistent bilateral trade imbalances around the world would mean a shrinking volume of world trade and a poorer world for us all.

The idea could also backfire. As the dollar continues to fall and the United States reaches an overall trade balance with the rest of the world, we will inevitably run trade surpluses with some countries. If those countries can turn our own legislative principle of countering bilateral imbalances against us, it will be U.S. exporters and their employees who will be hurt.

The second flagrant example of unfair unilateral protectionism in the draft legislation is the proposal to require the President to provide protection to industries that are hurt by imports even though foreign producers and foreign governments have done nothing unfair. Under present law, which is bad enough, the U.S. International Trade Commission already can recommend such protection. The proposed legislation, in its worst form, would require the President to accept all such recommendations. Even if this provision is watered down by allowing the President to reject the recommendation if he publicly declares it to be against the national interest, the pressure for increased unfair protection would clearly be increased.

This provision is a blatant violation of the principles of free and fair trade, and is quite different from retaliation against foreign firms that receive government subsidies or that dump their products to seize an unfair share of U.S. markets.

Indeed, providing such protection is regarded as a violation of the General Agreement on Tariffs and Trade, and requires the United States to compensate a foreign government for the harm done. And, like the notion of basing retaliation on bilateral surpluses, the principle of protecting industries hurt by fair imports would boomerang and hit American exporters once the falling dollar increases American market shares abroad.

The trade bill may be the most important piece of legislation that this session of Congress will enact. And if Congress doesn’t drop the dangerous notions of focusing on bilateral balances and protecting industries that are hurt by fair competition, American consumers and workers will be the big losers.