Balance Between Protectionism, Free Markets : Courts Could End Predatory Trade

The United States now runs a trade deficit of about $140 billion a year. We pay it by borrowing annually $50 billion from Japan, $35 billion from Western Europe, $20 billion from Canada, $14 billion from Taiwan, $14 billion from the OPEC nations and $7 billion from other trading partners.

For the first time since 1914, we owe more to foreign countries than they owe us. The United States, the world’s richest country, has become the world’s biggest borrower.

This troubles the American people, including many who never before gave a hoot about international trade and capital flows. They view our unfavorable trade balance and net debtor role as portents of economic decline, and they worry about our ability to pay for imports and compete in international markets.

Paradoxically, if it’s any comfort, it is the relative power and security of the American economy that put us in the present predicament. In recent years, real rates of return in the United States have been extraordinarily high, compared to both our own past performance and recent rates of return in other countries.

In 1984, the 12% average yield on U.S. government bonds, minus a 4% inflation rate, provided an 8% real return, with virtually no risk. In the same year, in Britain, West Germany and Japan, the return on long-term debt was about 5%. In the United States during the high inflation of the 1970s and the low-interest period preceding them, it was about 2%.

The high yields in the United States created a relentless demand for dollars to lend and invest here and sharply raised the dollar’s value relative to other major currencies. The strong dollar weakened exports and strengthened imports. As bargains from abroad poured onto our shores, trade deficits washed ashore with them.

Happily, the recent decline in the value of the dollar against the Japanese yen and other major currencies is producing a healthier competitive climate for American exports and the prospect of an improving trade balance.

Though not the fundamental cause of our trade woes, unfair competition is a significant factor. How to deal with it poses a conflict between economic theory and history.

Theory underpins our bias for free trade and tells us that it is efficient and beneficial. But history warns that trade often degenerates into economic warfare and that mature economies such as ours are particularly vulnerable.

This is the American dilemma: Must we give way to protectionism or can we find some middle ground that will enable us to hold fast to our free-trade ideals?

Protectionism is not the solution, nor would all the trade-impeding measures floating around Congress help. Protectionism would only transfer income from consumers and exporters to import-competing industries such as shoes and textiles.

Consumers would pay higher prices once the foreign competition was eliminated. Exporters would pay, because higher domestic prices mean higher domestic labor costs.

What’s more, trading partners respond to trade barriers with barriers of their own, which would make it doubly hard for exporters to get by.

Also, tariffs and quotas offer little hope for boosting employment.

Import-competing industries such as automobiles, steel and electronics have a higher-than-average capital intensity. On the other hand, American export industries such as business and scientific equipment manufacturers tend to be more labor-intensive. As a result, curbing exports costs jobs.

Fortunately, there is a middle ground. The best defense against predatory invasion of U.S. markets is selective enforcement of our trade laws by government and by private-sector targets of unfair competition.

The Trade Act of 1974 gives the President substantial authority to interdict unfair trade practices.

He can enforce U.S. rights in response to any foreign policy or practice that “unreasonably restricts or discriminates against” U.S. commerce. To expedite responses to unfair import competition, the act provides that an investigation can be triggered by petition from any interested party, without proof of injury.

The U.S. semiconductor industry has recently invoked these provisions in its defense against dumping of computer chips by Japanese producers.

Under the law, the President can also act in defense of American intellectual and industrial property.

The protection of patents and trademarks encourages research and provides an incentive to invest in productivity-increasing innovations. The unauthorized importation of an unpatented product made by a patented process may be deemed unfair competition.

No damages may be claimed, but the further import of the offending products can be blocked. This is important because much of the international trade litigation in the United States concerns patent infringement.

The Trade Tariff Act of 1984 increased the effectiveness of our anti-dumping and countervailing duty codes.

Also, the International Trade Commission, in determining causation and damages, must take into account imports from all countries into the United States in a particular industry.

In addition, countervailing duty provisions now take into account subsidies on components of the product exported.

A major legislative initiative now in Congress would put still more muscle in our trade laws. The bill would allow cases involving dumping, subsidies and customs fraud to be considered by federal district courts.

In addition to expanding plaintiffs’ options, it would open the door to retroactive damage claims. Foreign producers who dump their products into the U.S. market now pay no compensation to U.S. manufacturers for goods already entered.

Now more than ever, trade litigation can be the bulwark against international economic warfare.

Gone are the days of junk economics and amateur-act petitions that used to circulate in ITC hearing rooms.

The same economic reasoning and carefully marshaled evidence customary in complex antitrust and commercial cases have become the norm in trade matters as well.

If we continue to sharpen our trade litigation into a more effective tool and learn to rely on it more when called for, we will be able to defend ourselves against unfair practices without threatening the gains from free trade that have contributed so much to our standard of living.