‘Fair Trade’ Policies Harm This Country’s Consumers

Early this month Commerce Secretary Robert A. Mosbacher traveled to Tokyo to make the case for “fair trade.” He warned Japan’s government and auto makers against overly aggressive price cutting. The implied threat was that if Japanese producers cut their prices to U.S. buyers, the United States would begin an investigation into “dumping”--selling cars below cost.

This is one of many examples of our government using the language of fair trade against U.S. consumers’ interest. U.S. consumers benefit if Japan’s producers are willing to reduce car prices. Many of their cars (and U.S. cars) are made in the United States, partly from imported components, so the issue is not a pure case of harming consumers to help producers, a common rationale for government efforts to make trade “fair.”

The advocates of fair trade want cartels. They want to divide up the markets for automobiles, steel, semiconductors, textiles, apparel, machine tools and many other products by parceling out market shares that are protected against competition. When the producers can’t get cartel agreements signed, they use charges of dumping, or the threat of such charges, to reduce competition. Or they get the U.S. government to pressure foreigners to introduce “voluntary” export restrictions limiting exports to the United States. Their counterparts abroad react the same way toward agricultural products, construction services, aircraft, computers and other products that the United States exports.

Fair trade does not prevent high profits for foreign producers. It creates them. So-called voluntary quotas for auto imports raised the average price of Japanese cars and the profits of Japanese exporters. The quotas fixed the number of cars imported each year, so it was advantageous to the Japanese to sell higher-priced cars and to put many more extras on their exports. The table shows that expensive extras at least doubled after import quotas were introduced.

Quotas also encouraged Japanese producers to build plants in the United States to escape the quotas. By raising profits on imported cars, quotas helped Japanese auto makers finance these investments.

Of course, that isn’t the end of the story. Japanese and other producers sent car bodies and parts in place of cars. These became components of U.S. and foreign cars made in the United States. Also, encouraged by higher prices on Japanese cars, Korean firms began to export cars to the United States.

Korean cars and imported parts are imperfect substitutes for Japanese cars. So U.S. car producers continued to lose market share, and U.S. consumers paid higher prices for lower quality or for more restricted choices.

The damage from fair and managed trade is not limited to autos. Textile and apparel prices have been raised by quotas and other restrictions on imports. According to one estimate, the cost of restrictions on textile imports is about $26 billion. Each job “saved” in these industries is said to cost consumers about $130,000--in the form of higher prices for textiles and clothing. Not satisfied, producers asked for new restrictions last year. Additional costs to consumers could be $10 billion by the end of the decade.

Free trade works within the United States to raise standards of living. Massachusetts and New Hampshire are not worse off because in the 1930s and 1940s their textile and shoe industries moved to the South. Instead, the people there had to develop new industries that, in the end, produced higher-paying jobs and higher living standards.

The protectionists and special interests have had a field day under the fair trade banner. There is nothing fair about fair trade. It is just a way of picking the pockets of American consumers. Often the principal beneficiaries are foreign producers who profit from the higher prices when quotas and other restrictions replace open market competition.

Sure, other countries have restrictions against U.S. exports. They hurt themselves and us. The answer is not to retaliate and hurt our consumers. Our aim should be to get their barriers reduced.

What works within the United States can be made to work in international trade. We need improved enforcement of rules for trade, eventually moving to a world system that is like our internal market. The Uruguay round of trade talks has made progress in developing stronger rules for settling disputes and enforcing rules. These advances are not the last word, but they are important steps forward. Equally important, they would be part of a package that liberalized trade in many goods and services, including those in which the United States is a world leader.

To realize the agreement, the President needs renewed authority to negotiate under “fast track” provisions. These require Congress to vote on any new agreement without amendments. Unless the fast track authority is renewed, the Uruguay round is dead.

Protectionists and proponents of managed trade cartels have mounted an attack on the fast track authority. Consumers should see these efforts for what they are--a raid on their pocketbooks.

FULLY EQUIPPED As import quotas were introduced, expensive extras on Japanese autos at least doubled, boosting producers’ profits. Figures are in percent.

Automatic Power Air Year transmission steering conditioning ’81 30 32 29 ’87 64 85 57

Source: Ward’s Automotive Reports