Maintains Stiff Quotas : Free Trade: U.S. Talks a Good Game

Dean Herron, salesman for a plumbing contractor in Buffalo, N.Y., pays $1.89 for a 5-pound bag of sugar at a Buffalo supermarket. But, when he shops just across the Peace Bridge in Canada, he can buy the same amount for the equivalent of only $1.07.

The explanation for this is American trade protectionism. To shield domestic sugar producers from foreign competition, the United States maintains stringent quotas on low-priced sugar imports. “Prices are considerably higher in the States,” Herron laments.

Herron’s frustrations at the supermarket have a special symbolism right now. U.S. Trade Representative Clayton K. Yeutter is about to join trade ministers from 95 other countries at a meeting in Montreal next week to set a two-year agenda for global trade liberalization talks.

U.S. Push on Free Trade

Once again, the United States is almost certain to portray itself as a model of free trade and press its trading partners to follow in its footsteps.

“After the Second World War, America led the way to dismantle trade barriers,” President Reagan said in his weekly radio address last Saturday. At the meeting in Montreal, he said, “we will be in the forefront of efforts to improve this system.”

But, although America’s markets are the most open in the world, the United States maintains stiff--and some say dubious--trade restrictions on an array of products ranging from beef, dairy products, peanuts and cotton to rubber footwear and ceramic tiles.

What’s more, the Reagan Administration, despite its free-trade stance, has imposed new quotas or restrictions--or significantly tightened existing ones--on textiles, sugar, semiconductors, autos, steel, machine tools, motorcycles and lumber.

Sees Rise in Barriers

Gary Clyde Hufbauer, a Georgetown University trade expert, estimates that the proportion of U.S. imports affected by trade barriers has risen from 12% in 1970 to 23% now, a period in which Japan and Western Europe generally have been reducing their trade barriers.

“By any account,” Hufbauer said, “the U.S. is the biggest new sinner.”

Trade experts say that the cost of these restrictions generally is paid by consumers. Tariffs directly boost the price of imports, and quotas keep out relatively cheap foreign goods and allow U.S. manufacturers to raise their prices.

Hufbauer calculates that import restrictions will cost U.S. consumers $81 billion this year, up from only $16 billion in 1970. And, although they may save jobs in some industries, they hurt U.S. businesses in others.

Moreover, many of the restraints have just plain backfired.

William Niskanen, a former Reagan Administration economic adviser now at the Cato Institute, says the imposition of quotas on Japanese autos in 1981 enabled Japanese firms to boost their prices--and profit margins--and pushed them into upscale markets. But the quotas did little to dampen sales of Japanese cars, according to most analysts, and Japanese auto makers have increased their share of the U.S. market every year since the restraints were imposed.

Similarly, the steel quotas that Reagan imposed in 1984 aggravated steel shortages here earlier this year, raising prices for steel users and forcing firms, such as Caterpillar Inc., to ration deliveries of their products to customers. “There’s no doubt the steel quotas have hurt our profits,” George A. Schaefer, Caterpillar’s chairman, said.

The restraints have some serious foreign policy implications also. For example, besides keeping sugar prices here much higher than in other countries, the U.S. quotas on sugar imports--widely criticized as unnecessary--are seriously strapping the economies of the Philippines and friendly countries of the Caribbean basin.

“The impact can be substantial on the sugar-exporting countries,” said Robert D. Hormats, a former State Department economic policy-maker who now is a vice chairman of Goldman, Sachs & Co., the New York investment firm. “Most of these countries don’t have a lot of products to export besides sugar, and so the effect is even more pronounced.”

Positive Result

To be sure, Reagan Administration officials argue--with some credibility--that the increasingly protectionist stance that the United States has taken on trade since mid-1985 has had a positive result: It has been a major force in propelling the trade-liberalization talks that the trade ministers will review in Montreal next week.

The separate U.S.-Canadian free-trade agreement, which received implicit endorsement in Canada’s national elections last week, resulted partly from apprehensions on the part of Canadians that, if they did not enter into an umbrella trade pact with the United States, Washington would impose more trade barriers on Canadian goods. Similar fears are pushing poorer countries into backing some U.S. demands.

Find Out Too Late

The problem is that policy-makers both here and abroad frequently find out too late that it is far easier to impose trade restrictions than to remove them, even when the restrictions clearly have become counterproductive. Domestic industries quickly grow accustomed to protection from imports, and they find it easy to persuade lawmakers to extend them.

Washington has voluntarily lifted only two major trade restraints in recent years. A law requiring that all books and periodicals with U.S. copyrights must be printed and bound in this country had been on the books since the 1700s until Congress revoked it last year. And Congress imposed temporary tariffs on foreign motorcycles in 1983 and let them expire as scheduled in 1986.

U.S. sugar quotas, by contrast, show no sign of disappearing--at least, not at Washington’s initiative. The lobbying effort on behalf of the quotas unites small cane-growers with such agribusiness conglomerates as Archer Daniels Midland.

Boost Production

The quotas, imposed in 1982 as part of a political trade-off with sugar-state lawmakers, have spurred artificially high domestic production of sugar beets, cane and corn-sweeteners. That production now depends on high prices at home to offset falling demand.

The government has had to reduce the quotas continuously to keep domestic prices up. The United States now allows 1.05 million tons of sugar imports, compared with 3.2 million four years ago.

But protests by U.S. trading partners are becoming more strident. Just a few weeks ago, Australia, backed by the European Common Market, filed a formal complaint against the sugar quotas in the Geneva-based General Agreement on Tariffs and Trade, the international organization that administers world trading rules. If the United States loses the dispute, it could be under new pressure to withdraw the sugar quotas.

The steel quotas look no less permanent. Although American steelmakers were in tough straits four years ago, the U.S. industry today has become the world’s most competitive supplier, and it enjoys hefty profits and export sales.

Extension Likely

Yet, most analysts expect the industry to easily win its campaign to extend the quotas when they expire next September. Although Caterpillar is heading a drive to block the continuation of the import restraints, President-elect George Bush has already promised Sen. John Heinz (R-Pa.) in a letter that he will support an extension.

Textiles and apparel represent another industry that is heavily protected by import restrictions--and constantly seeking even more. The Reagan Administration just finished negotiating a new global compact further tightening textile quotas. This year, the industry tried to push through stiffer legislation, but Reagan vetoed it and Congress narrowly failed to override his veto.

What frustrates many conservatives is that, despite the President’s complaints about protectionist demands in Congress, few of those restraints have been mandated by Congress. Reagan imposed the bulk of them himself, contending that Congress would have enacted still tougher limits if he had not taken the initiative.

Little Change in Trade Law

“This deterioration in U.S. trade policy was implemented largely without any major changes in trade law,” Niskanen writes in the latest issue of the American Enterprise Institute’s Regulation magazine. As a result, he said, “the Reagan Administration must bear the primary responsibility for this record.”

Niskanen, as a member of the Council of Economic Advisers in Reagan’s first term, opposed many of the Administration’s quota measures.

Ironically, Niskanen points out, the tightening in U.S. trade policy occurred just as many of America’s major trading partners were reducing their trade restrictions. Japan eased or eliminated tariffs on aluminum products, cigarettes and leather products and substituted tariffs for restrictive quotas on beef and citrus products. Korea and Taiwan also have eased some restrictions.

More Barriers Possible

Moreover, many trade experts believe that the omnibus trade law that Congress enacted this year will intensify pressures for imposition of even more U.S. barriers to foreign imports. The legislation, initiated by Congress but embraced enthusiastically by the Administration, makes it easier for U.S. firms to obtain the protection they demand.

Beyond overt restrictions on foreign goods, the United States has failed to meet its trading partners’ major economic demand--that it substantially pare back its budget deficit. Foreigners complain that the U.S. budget deficit, by raising U.S. interest rates and attracting foreign capital to the United States, aggravates worldwide trade imbalances.

William E. Brock III, Yeutter’s predecessor as U.S. trade representative, said that Washington needs not only to reduce the federal budget deficit but also to spur more savings and investment if it wants to pare the U.S. trade deficit.