Shift of Priorities : U.S. Sounds an Economic Call to Arms

The sleek, camouflaged F-16 fighter jet taxis onto the apron, revs its engine one more time and, with an ear-piercing scream, roars down the 12,000-foot runway and angles up into the bright Texas sky.

To Steve Barter, test pilot for General Dynamics Corp., the plane’s builder, it is a sweet sound. “The best fighter aircraft around,” he says with pride.

The Japanese think so, too. Their decision to develop an advanced fighter of their own, relying heavily on F-16 technology borrowed from the United States, set off a bitter controversy that centered on a single airplane but laid bare a fundamental shift in America’s role in world affairs.

Containment of Communism

For more than four decades after World War II, the United States routinely subordinated its narrow economic interests to broad diplomatic and military objectives--mainly, the containment of communism.

No longer. When Japan proposed to build its own fighter, the FSX, the economic implications overshadowed military concerns. Critics said Japan would use the technology to develop its own civilian aircraft industry and dislodge the United States as the world’s No. 1 manufacturer of airliners--one of the few technological fields it still dominates. So federal officials reopened the FSX deal and obtained new guarantees from the Japanese.

The government’s handling of the FSX affair represents a major turning point in U.S. policy. Converging circumstances--a relaxed Soviet military menace and mounting economic competition from Japan--are eroding longstanding U.S. doctrines of free trade and economic altruism. Americans are becoming less concerned about the Cold War and more concerned with the economic tug of war with Japan.

“That’s what this FSX dispute is all about,” said Robert Z. Lawrence, a specialist in international economics at the Brookings Institution, “a change from a geopolitical contest with the Soviet Union to a rivalry with Japan over economic issues.”

Analysts such as Lawrence have a name for the emerging view that the United States must protect its markets. They call it the “new economic nationalism.”

Economic nationalism embraces trade protectionism in a variety of forms and encourages an active role in promoting American industry in the increasingly competitive international marketplace. It is present now to a degree not seen since the 1920s and the early years of the Great Depression.

A recent Times-Mirror poll found that most American voters now regard the Japanese economic juggernaut, not Soviet political expansionism, as the greatest threat to national security. Another poll, taken by the Yankelovich firm for Time magazine and Cable News Network, found that 76% of the voters see Japan’s success in world trade as a threat to the U.S. economy.

“The Cold Peace with Japan is replacing the Cold War with the Soviet Union,” said Alan Webber, managing editor of the Harvard Business Review. “Just as America’s strategy for dealing with the Soviet Union provided a global framework for the period between 1945 and 1990, so America’s strategy for dealing with Japan will create a new framework for geoeconomics in the 21st Century.”

The debate over how the United States should respond to the challenge from Japan and other new economic powers has divided U.S. business and political leaders into two camps.

On one side are those who contend that the United States and Japan can forge a partnership to replace the outdated relationship that enabled Japan--and Western Europe as well--to rise to prosperity under America’s wing.

Two-Edged Sword

Indeed, for many of those who want to enhance U.S.-Japanese ties, the FSX project was just another opportunity to build what Mike Mansfield, a former U.S. ambassador to Tokyo, called “the world’s most important bilateral relationship.”

Zbigniew Brzezinski, national security adviser to President Jimmy Carter and a senior adviser to George Bush during last year’s presidential campaign, said of the two nations: “The strengths of one compensate for the weaknesses of the other. Working together ever more closely, they can assure for themselves unrivaled global economic, financial and technological leadership.”

On the other side of the issue, those who believe Japan is bent on winning an all-out industrial competition want to sharpen the brewing conflict.

They advocate an aggressive policy of “managed trade” by which Washington would limit Japanese penetration of the American market and force Japan to guarantee U.S. firms a share of its own market. By this view, police Sgt. Joseph Jablonski of television’s “Hill Street Blues” had the right idea when he said: “Let’s do it to them before they do it to us.”

Hard-Liners at Fore

This side is enjoying increasing political clout. The Ronald Reagan Administration, for all its free-trade rhetoric, doubled the proportion of U.S. imports subject to various forms of protection even as calls for trade relief poured in from dozens of industries pinned to the wall by the strong dollar of the early 1980s. Congress last year enacted a trade law that increases pressure on the Administration to pursue unilateral retaliation--rather than use existing international dispute-settlement machinery--to seek redress of American trade complaints.

More particularly, after Reagan’s State and Defense departments and Japan had reached agreement on the FSX, Congress and President Bush’s own Commerce Department forced the new Administration to renegotiate the deal for terms more favorable to U.S. business.

Critics charged that Reagan’s foreign policy advisers, in their eagerness to maintain longstanding national security ties with Japan, had agreed to give away technology that Japan could use to challenge U.S. dominance in civilian aircraft.

The Bush Administration obtained guarantees that Japan would allocate 40% of any FSX production contracts--not just development work--to American firms, and would pass on to the United States any new technology derived from the FSX project.

Hostile Resolution

Even that was not enough for Congress, which later passed a resolution urging that Japan be denied the technology needed to produce the FSX engine.

Bush last week vetoed the resolution, a step that risks further backlash in Congress. Not only did a majority of both houses support the resolution, some congressmen opposed it because it was not tough enough.

In the hard-liners’ camp was Rep. Richard A. Gephardt (D-Mo.), the House majority leader, who tried unsuccessfully to make economic nationalism an issue when he ran for President in 1988. He believes his approach is now catching fire.

“Lots of groups come to town that three years ago were stoutly free-trade and didn’t even want to talk about a change in trade policy,” Gephardt said. “Now, they literally are talking about (industrial) extinction. They want us to act.”

Part of the reason is general battle fatigue over America’s trade deficit. The gap has been narrowing steadily for two years, but not fast enough to satisfy Gephardt and many other lawmakers. Even though a trade deficit with Western Europe has been turned into a surplus, U.S. imports from Japan still exceed exports by roughly $50 billion a year.

‘Yellow Peril’ Theory

But there is a deeper cause--the fear that the United States is losing control of its own economic destiny. David Boaz, a senior official at the Washington-based Cato Institute, a free-market think tank, warned of a xenophobic campaign against the latest “yellow peril.”

“People feel this need for a devil figure, and if the Russians are fading as the enemy, it looks like we will try to find a substitute,” he said. “The Japanese are coming up fast.”

Signs of the new national obsession are everywhere. People lament that foreign investors--particularly Japanese--are “buying up” America. Policy-makers fret that Western Europe’s plan to form a single market by 1992 will shut out U.S. goods.

Paul Freedenberg, undersecretary of commerce under Reagan and now a trade specialist with a Washington law firm, suggested that economic nationalism is going to “take over and color everything we do. This is a lens through which all major deals will be viewed.”

The new economic nationalism has sprung from disenchantment with the economic world order that the United States itself created after World War II.

Postwar Policy Recalled

Charles Kindleberger, the eminent Massachusetts Institute of Technology economist, served in Europe as a young State Department strategist during that period. Even before the first Allied troops had crossed the Rhine or entered Tokyo Bay, he said, the United States had begun fashioning postwar security and economic policy based on the belief that the best way to prevent another outbreak of war was to help restore prosperity to a devastated world.

In defiance of those who demanded destruction of the enemy, the United States would help war-ravaged Germany and Japan get back on their feet. America would place its commercial interests second to global prosperity. At the same time, it would use its military might to keep the peace.

Kindleberger said those postwar policies proved to be “one of our great success stories.” Both Japan and West Germany have risen from the rubble to become economic superpowers--nose-to-nose competitors with the United States. Newly industrialized countries that America helped nurture, such as Taiwan and South Korea, have turned into economic tigers.

Most analysts say they expect to see further changes in the next decade, on a scale not seen since the 1940s. Japan, they believe, will assume a more dominant role as an economic leader. The Asian “tigers” will continue to develop rapidly and the socialist world will turn more toward free markets. Europe will become more united economically than at any time since Charlemagne.

Signs at the Summit

The recent economic summit in Paris, for all its surface calm, appeared to mark a significant turning point for the United States. It was clear that America no longer has the clout or the funds to lead the world around by the nose, and European leaders were demanding a part in shaping global policies.

These changes are breeding uncertainty in the United States even as the stubborn trade deficit--the most obvious manifestation of this nation’s new-found difficulty in competing in the global economic arena--refuses to go away.

Most analysts agree that so-called unfair trade practices are responsible for only a small part of the deficit, which was narrowed to $119 billion last year from a record $152 billion the year before. Even Japan has all but eliminated most of its formal trade barriers, although its archaic product-distribution system, interlocking corporate directorates and political practices still push consumers overwhelmingly to favor domestic products over foreign goods.

Not Enough to Buy

Rather, the trade deficit largely grows out of stark differences in economic practices here and abroad. The Japanese and most European nations chalk up trade surpluses largely because they are unable to invest all their savings at home.

Americans, on the other hand, continue to spend more than they can produce, forcing the nation to make up the difference through imports of goods and capital. Americans save relatively little of their riches, leaving not quite enough to finance the business expansion needed to produce more goods for export. Moreover, even after substantial gains in recent years, many U.S. firms still do not seek markets abroad.

This year, the dollar even started to rebound, thus making U.S. goods more expensive in world markets, and many experts fear that the trade gap will widen again. “We are running out of nostrums,” Sen. John Heinz (R-Pa.) complained.

As political pressures to get tough on trade mount, the Bush Administration seems unsure of how to respond.

Protectionist Agenda

Commerce Secretary Robert A. Mosbacher, beating the drums of economic nationalism, has gone on the warpath against Japanese economic practices. Although he has been forced to back off from plans for new subsidies for the development of high-definition television and other advanced technologies, Mosbacher remains at the forefront of those promoting government support of U.S. industry--lifting antitrust restrictions, continuing protection of the steel industry and demanding that Europe consult with the Administration in an effort to ward off measures that might impede U.S. firms after its internal barriers come down in 1992.

Carla Anderson Hills, Bush’s trade negotiator, has pressed for vigorous enforcement of last year’s trade act, although she insists that she is not trying to restrict foreign entry to America’s vast marketplace. “Our trade strategy is to open markets, to expand and liberalize trade and to adopt clear and enforceable rules,” she said.

On the other side of the issue, Michael J. Boskin, top White House economist, warns that efforts to manage trade with the rest of the world could get out of control.

“If we wind up with a series of these retaliatory measures with our trade partners,” he said, “it will not only cause a recession in the United States, it will cause a worldwide recession.”

Rivals Singled Out

Boskin made that comment shortly before Bush settled a protracted internal debate over how tough to be in applying the new trade law. The President chose to single out Japan, Brazil and India for retaliatory measures because those countries had refused to lower barriers against U.S. goods. The U.S. action, still to be determined, is to be imposed only if subsequent negotiations fail.

Arguably, retaliation of any sort is growing less effective as the rapid global reach of business and technology erases the limits that national boundaries once imposed on international trade and investment.

U.S. and foreign multinational corporations--from giants such as IBM and Honda to entrepreneurial upstarts such as Sun Microsystems and Liz Claiborne--are so widely dispersed around the globe that it is difficult to say whether they are American or foreign.

“The spectacular decline in the cost of moving goods, people and--especially--information across national borders has left governments with little room for unilateral action and little choice but to find changed forms of mutual accommodation,” contends retired Harvard economist Raymond Vernon, co-author of the recent book, “Beyond Globalism.”

And some analysts regard the trade deficit not as a sign of weakness, but as an inevitable byproduct of the billions of dollars in foreign currency that flow into the safest and most reliably profitable center of investment in the world--the United States.

“International capital markets are now some 15 times larger and many times more efficient than goods markets,” said George Gilder, a free-market economist about to publish a book on the changing face of the microelectronics industry. “Capital thus dominates trade in international exchange. As long as capital can flow to the best opportunities anywhere in the world, trade can balance between any two countries only by accident.”

Harald B. Malmgren, a Washington-based trade consultant, is convinced that the nation’s flirtation with economic nationalism gives way to global markets.

“Globalism will override nationalism no matter what the government does,” he said.

The controversy over Japan’s fighter jet project remains the most vivid reflection of economic nationalism to date. Although the Bush Administration negotiated a better deal, some analysts complained that the long-term consequences will not be in America’s interest.

Regrets on Reneging

Reneging on the original deal, said James Abegglen, president of Asia Advisory Services Ltd., a Tokyo-based consulting group, has seriously damaged U.S.-Japanese relations.

“America looks as though it won’t keep an agreement,” Abegglen said. To the Japanese, he said, Washington’s apparent petulance over the FSX deal “looks like weakness.”

At the same time, the Japanese were so stung by congressional reaction to the original FSX deal that they are quietly beginning to step up their own military development plans out of fear that mistrust in the United States will jeopardize future transfers of U.S. technology to Japan.

Yet, as the FSX episode demonstrated, economic nationalism is fast catching up with national security considerations as a driving force behind the formulation of U.S. policy around the world. The consequences, like the sound of an F-16 that has already disappeared over the horizon, are certain to linger for years to come.