THE NEW TRADE WAR

...According to one spokesman familiar with the Youngstown crisis, "people had their economic foundation pulled out from underneath them by planning decisions made elsewhere and the community began to ask who controlled these planning decisions and in whose interests...

...subsidies to great U.S...

...When in 1930 the United States enacted the Hawley-Smoot tariff to protect domestic markets from imports, the other advanced capitalist countries retaliated and everybody's trade virtually ground to a halt...

...point of view, the appreciation did not have the desired effects...

...steel industry (with the union leadership in its pocket) has sought, and recently obtained, government protection in order to keep the share of imports under 20 percent of the U.S...

...and world markets with plants and equipment that were built before the first World War...

...Obviously, if the growth of markets is limited, not everybody can succeed...

...demands cannot be taken lightly...

...was only too happy to rehabilitate a major capitalist power in Asia, and though there was little direct investment in Japan, U.S...

...But at the same time, U.S...

...This in turn inhibits growth and brings fears of a new recession in 1978 or 1979...

...However there is no evidence that these subsidies are a significant factor which makes Japanese steel more competitive...

...The accepted theory here is that because the U.S...

...Since 1973, the world has a system of floating exchange rates...

...But there is still a growing realization that the long postwar economic boom, which provided the economic basis for the American-European-Japanese alliance, has come to an end...

...Thus, it should come as no surprise that the monetary system has remained in a state of flux and extreme uncertainty...

...Japan's modern technological base is augmented by their paternalistic statistmanagement structure in which business, labor and the government closely coordinate their actions...

...At this point, of course, the U.S...

...If these products—textiles, shoes, handbags—become subject to increasing import restrictions, even these modest gains would be threatened...

...While neither Japan nor West Germany has the power to supplant the U.S...

...After that, the Japanese, though outwardly accommodating, were unwilling to yield to the plan, which even included a target date for adoption...

...At the same time, Japan is more dependent on imports of primary commodities (fuels, Commonweal: 237 The spread of protectionism will surely have a detrimental effect on Third World economic growth...

...In addition the developing Japanese "software" industries (i.e., computers) are beginning to penetrate American markets and will do so increasingly in the future...

...steel industry proved no exception...

...The U.S...

...With Japan's exports pouring into the U.S...

...By abrogating our responsibility to supply gold at $35 an ounce to foreign holders cashing in U.S...

...In conven1 will stimulate es of its goods An overvalued prices of one's :lean" currency ts automatically g to the desires apanese central i markets, buykeep the value he dollar then) > currency artitne, Japan kept its export prices low (in terms of other currencies) to supplement its exports...

...The main obstacle to this is still the laggard prospects for adequate economic growth...

...Humbled and destroyed after the war, European and Japanese firms had no alternative but to build new plants with modern technology, which they often did with state financing and ownership...

...who formerly renounced protectionism as a cure for unemployment, is being compelled by continuing economic stagnation and political forces to yield to specific demands for relief in hopes of heading off a flood of others...

...Another implication is that European central bankers are compelled to intervene in foreign exchange markets to prevent the dollar from declining too steeply...

...What Ignatius is really saying is that the Japanese are willing to hold prices down in order to carve out new U.S...

...Indeed, the system can only function if and when the leading capitalist powers are willing to agree on the ground rules and abide by them...

...slapped some form of across-the-board controls on Japanese imports its expansion plans would be in serious jeopardy...

...industries like automobiles and defense which have facilitated their competitive position in international markets and created a lot of demand for U.S.-made steel in the process...

...power...

...For a variety of reasons, including the rapid recovery of Japan and West Europe, chronic U.S...

...If there is to be international trade and investment, there has to be a means of settling international transactions acceptable to trading nations and certain rules about how accounts will be settled...

...firms, the American competitive position in certain markets steadily eroded...

...to invest in 20 years of participation in a free economy before you catch our disease...

...When the Youngstown plant closing was announced last fall, the national union leadership and business interests were of little help in devising a program to protect the livelihoods of the workers and their families...

...As the Economist of London aptly remarked: "The U.S...

...would not intervene should the dollar fall, he clearly hoped that, while pushing them to apply the expansionist medicine, rising values of their currencies would restore some of the trade imbalance...

...As other nations acquired modern technology, sometimes leased to them by U.S...

...Precisely to avoid this kind of destructive competition and promote cooperation between the leading power centers of the U.S., Western Europe and Japan, among other things, the Trilateral Commission was established in 1973...

...metals, minerals) than the others and depends much more on exports to maintain domestic economic growth...

...The result of this is that some U.S...

...During most of,the postwar period, we a^ ^d to be getting the best of both worlds...

...Last summer Treasury Secretary W. Michael Blumenthal began complaining in public about the large European and Japanese trade surpluses in the face of a projected $25-30 billion U.S...

...Immediately after the war, the U.S...

...However, this superiority was bound to be short-lived...

...industry is too arrogant to do the same...

...by being forced to buy large amounts of dollars...

...More Intensive Conflicts This is precisely the point: however grave the current crisis of steel may seem and whatever the results of the new Carter program, this crisis is but a harbinger of greater and more intensive conflicts to come between the U.S...

...Now the U.S...

...competitive advantage...

...But now that overall economic growth and growth in trade in particular has slowed, Japan is being forced to make concessions which would threaten that high growth economy...

...Throughout 1976, the Japanese central bank was intervening in foreign exchange markets, buying large amounts of dollars in order to keep the value of the yen (which stood about 300 to the dollar then) from rising...

...The religious group, known as the Ecumenical Coalition of the Mahoning Valley, believes that what happened in Youngstown is likely to be repeated in other communities around the country, thus bringing issues of worker and community control of abandoned production facilities to the forefront of the political agenda...

...45 percent of the wheat produced in the U.S., 25 percent of the aircraft, over 40 percent of the construction and surface mining machinery, and one-fifth of U.S...

...Under these circumstances, the situation of Japan is especially tenuous...

...industry is that the Japanese are engaging in price competition which domestic producers are either unwilling or unable to meet...

...In* theory, under a system of floating exchange rates, the value of any currency is determined by the demand for the currency in relation to its supply...

...market...

...In an interesting sidelight to the Lykes case, there is good evidence that the steel division of Lykes's operations was milked by the parent holding company, which is a shipping firm worth much less than Youngstown, which it acquired in 1969...

...If there is little demand for a nation's exports, people will probably not buy its currency and its value will fall in relation to others...

...Whether or not the scenario of a 193Os-style trade war will be replayed is not the fundamental question...

...One nation's surplus is someone else's deficit...

...Interestingly enough, Bosworth tempered his criticism of the industry after he became Director of the Council...

...at record levels, the Carter policymakers turned in frustration to attacking certain imported products like steel...

...Calling floating exchange rates "the calm before an The deterioration of American hegemony is perhaps most visible in the crisis of the international monetary system...

...As other nations acquired modern technology, sometimes leased to them by U.S...

...This may well indicate that U.S...

...What about Japan's alleged "predatory pricing practices" and "systematic dumping" of steel on U.S...

...While previous attempts to legislate renewed high levels of protection in this decade, like the BurkeHartke bill of 1972 and the Nixon import surcharge MICHAEL moffitt is a Fellow of the Transnational Institute, a program of the Institute for Policy Studies in Washington...

...firms also modernized and innovated, but this often involved product differentiation and design, not basic restructuring of industry...

...By keeping the value of its currency artificially low for an extended period of time, Japan kept 14 April 1978: 236 35 an ounce to ., the Nixon adbroke with the tpts to patch up eir effectiveness, ternational cona new monetary toward a lasting sents the instituiships...

...Aside from the purely protectionist measures, the steel industry's response to the crisis has consisted of a new round of anti-competitive mergers (such as Jones & Laughlin Steel's, a subsidiary of the LTV conglomerate, intended absorption of Lykes), increased plant closing, layoffs, and renewed assaults on environmental protection...

...Nor do most government spokesmen mention the large U.S...

...for their exports, but not vice-versa...

...expanded its trade and foreign investments in an unprecedented movement of men, machines and money...

...Japan, in effect, will be penalized for being efficient...

...To understand why, we must recognize that profound changes in world economic conditions have taken place in the last decade...

...steelmakers are now attempting to compete in U.S...

...It is not surprising that the most creative response yet to the crises of communities such as Ohio's Mahoning Valley, which are the victims of trade-related dislocations, have gotten the least publicity...

...When American firms were technologically superior in most industries, the United States remained the world's leading spokesman for multilateral reductions in tariff barriers...

...exports and adopt a more expansionary economic policy, may ultimately prove to be no more meaningful than the value agreements that have 'been reached at the several recent economic summits...

...One lesson of this chain of events is that the world capitalist economy has entered a profound structural crisis...

...Instead, they sought to fuel domestic growth by expanding exports, rather than risk a new round of inflation at home...

...In the aftermath of the 1929 Great Crash, it seemed that the days of free trade were gone forever...

...The whole process is usually accompanied by charges that barriers are only erected to protect domestic markets from "unfair competition" or that foreign producers are "dumping" (selling below cost) goods onto local markets...

...Various other import restriction agreements, involving shoes, textiles, automobiles, handbags and agricultural products like sugar have either been announced or are in the works...

...As one European banker remarked to the New York Times, "I'm afraid Carter is pulling another Vietnam on us...

...For most ible to maintain tton Woods sysng military and omic advantage i the U.S., the it should come m has remained tainty...

...Since no ine the rules of i of floating exit deal of coopleed, the system lading capitalist ound rules and of floating exi of floating exy is determined ition to its suptation's exports, :y and its value banks' actions ich intervention svements in exg values...

...The higher yen has not encouraged more Japanese imports or curtailed their exports to the U.S...

...For most of the postwar period, the U.S...

...Central banks' actions naturally affect exchange rates, but such intervention is theoretically to smooth out erratic movements in exchange rates, not to influence underlying values...

...Monopolies tend to grow stagnant with age and the highlyconcentrated U.S...

...steel industry...

...Each restriction usually begets a reprisal and, sooner or later, everybody winds up with inventories of surplus goods for which export markets no longer exist...

...The conflicts which beset the United States, Western Europe and Japan were not caused by distortions in exchange rates and cannot be overcome by simply re-adjusting them...

...In recent times, however, the United States, the EEC nations and Japan have been abusing the system of floating rates and manipulating exchange markets in order to fight a concealed trade war...

...Europe is going socialist," according to one banker, "here's a chance (in the U.S...

...In the last century, under the hegemony of Great Britain, the pound sterling functioned as the world's currency and surpluses or deficits in a nation's trade balance were settled by movements of gold...

...steelmakers anticipated the Japanese onslaught all along and simply decided to postpone modernization until the government would agree to underwrite the rationalization and rebuilding of the industry...

...The difference is that in the last decade, the U.S...

...George Meany then picked up the gauntlet, calling free trade a "joke and a myth," and urging that the U.S...

...14 April 1978: 238...

...States, the EEC the system of lge markets in 'his has been a to play a large at to do about est...

...For years, many Third World countries have attempted to expand their exports of labor-intensive manufactures...

...goods into Japan...

...Thus far, Japanese policymakers have appeared very accommodating outwardly, but some sources say they are fuming and are by no means prepared to make the kinds of concessions the U.S...

...Profits represent what is "left over" after covering costs...

...Because in weak markets, they sell at prices that approach marginal costs, making it difficult for anyone to earn a profit...

...producers constantly complain about...

...As Wall Street Journal columnist David Ignatius explains (November 21) ". . . the American steel industry has argued that the foreign producers are 'unfair' competitors...

...This, no doubt, is one of the reasons why the industry's leading producer, U.S...

...If the first two decades of the postwar period witnessed an unprecedented expansion of the power of the U.S...

...Holding on to a large share of the world market did 14 April 1978: 234 not require the modernization that Japan was compelled to undertake in order to rebuild its industry and capture new markets...

...and its major trading partners...

...In the final analysis, we may be forced to admit that we have never learned Keynes's lesson of how to enjoy full employment at home without waging destructive wars and trade wars against our neighbors...

...Despite a dramatic recovery of profits, corporations say they simply will not commit large amounts of capital to basic investment and expansion until the uncertainties over tax policies, energy, import quotas and the value of the dollar have been settled...

...What is troubling the U.S...

...Carter's economic policy makers, especially at Treasury, were determined to put a stop to this...

...In November, one of Strauss's aides, Richard Rivers, presented Tokyo with an "import plan" designed to force the Japanese to allow imports of more U.S...

...markets and that the U.S...

...as the world's leading capitalist power (especially in military affairs), at the same time they feel no great compulsion to acquiesce to every American demand...

...has recovered from recession faster than its major trading partners, this has stimulated demand in the U.S...

...Ultimately, this policy of "benign neglect" toward the dollar led to outcries that the U.S...

...This was far from characteristic of his times...

...The uncertainty and lack of "business confidence,'" which we hear about so often, appears to have taken on a life of its own to the point where it becomes a self-fulfilling prophecy...

...Competition from imports intensified in the early 1970s and Nixon responded with a 10 percent surcharge on imports and a series of monetary measures, designed to regain the U.S...

...Steel, has announced a new round of price rises...

...Thus, Japan was engaging in a "dirty" currency float in order to maintain exports and jobs at the expense of its major trading partners...

...firms, the American competitive position in certain markets steadily eroded...

...Blumenthal probably felt especially betrayed after their last May's London Economic Summit, when the Japanese had pledged to reflate and reduce the trade surplus...

...If these products—shoes, textiles, handbags—become subject to increasing import restrictions, even modest employment gains will be threatened...

...A monetary or trading system represents the institutionalization of a set of power relationships...

...economic advantage has diminished and rivalries between the U.S., the EEC and Japan are accelerating...

...This is why the Youngstown Sheet and Tube company, a subsidiary of the Lykes Corp., closed its Campbell (Ohio) plant recently and terminated 5000 jobs...

...In conventional economic theory, firms competing in free markets produce until die cost of producing the final unit is greater than the price it will bring on the market...

...But however lucrative such activities are for stockholders and managements, they do nothing to enhance real economic growth, on which the viability of the whole world system ultimately depends...

...The latter is called full-cost pricing...

...He had been an industry critic while at the Brookings Institute...

...By setting "reference prices" for imports, Carter has in effect said to Japan: no more price competition in the U.S...

...If monopolies stagnate with age, they also grow greedy and this is steel's other major problem...

...absorbs about one-fifth of Japan's total exports and much higher percentages in crucial goods like steel, autos, and electronic products...

...steelmakers "got greedy" and pushed up prices earlier in the 1970s when they should have taken advantage of two dollar devaluations which had effectively raised the price of Japanese steel here...

...On this score, neither the Keynesians nor the Monetarists have any answers...

...Thus German Chancellor Helmut Schmidt complained at the recent Common Market meetings that Western Europe was "financing" the U.S...

...If the U.S...

...Indeed, in the last chapter of his opus, The General Theory of Employment, Interest and Money, he states that "if nations can learn to provide themselves with full employment by their domestic policy . . . there need be no important economic forces calculated to set the interest of one country against that of its neighbors...

...Though changing historical circumstances always make generalizations difficult, it is easy to see the logic of these developments...

...Here are the facts: Last spring President Carter sent his chief trade negotiator, Robert Strauss, to Japan to negotiate a limit on Japan's exports of color television sets to the United States...

...Consequently, local religious leaders assumed the responsibility of exploring the possibility of community and worker ownership of the steel works in order to make it economically viable if not "profitable" in Big Steel's sense...

...deficit...

...The case of steel is, of course, important and complicated enough to require a separate analysis, but the essential features of the industry are clear and hold important lessons for what may be just around the corner in a number of others...

...industry and its representatives in the government will cry in unison that the Japanese government subsidizes its steel firms, which is why they can sell below cost in this country...

...The clearest example of the erosion of American position is the steel industry and this is the source of the industry's current woes...

...This has been a source of constant tension and figures to play a large role in current deliberations about what to do about Japan's large trade surplus with the West...

...is able to trade its paper I.O.U.'s for real goods and services...

...do unto others as they do to us, barrier for barrier, closed door for closed door...

...In periods of economic contraction, corporations and capitalist nations typically try to do what Keynes said they shouldn't: expand markets and maintain high employment at the expense of their trading partners...

...In contrast to earlier periods, the most striking thing about the current situation is the extent to which the fate of individual nations is dependent upon the others...

...During the 1960s the overall performance of the world economy was strong enough to absorb Japan's huge exports...

...After the First World War, reflecting the ascent of the United States as a major power, New York became the world's banker and following the Second World War the dollar became the world's currency...

...In addition, the spread of protectionism will surely have a detrimental impact on Third World economic growth...

...agricultural chemicals are exported...

...What matters is whether or not the world capitalist economy, in a world where there is no single dominant power, will be able to regain the balance between competing interests which was achieved under the dominance of the United States...

...firms profited considerably from technology licensing and sales...

...When an industry becomes monopolized, however, matters are very different...

...warning that Japan should "open to our exports and fast...

...stopped talking up the yen and started threatening Japan with a trade war...

...steel purchasers have turned to their products...

...Though the performance has seldom lived up to the expectations, these exports did offer some gains in employment...

...in the world, then the most significant characteristic of the last ten years has been the challenge to U.S...

...According to the Federal Trade Commission, government subsidies to German and Japanese steelmakers amount to less than one percent of their production costs, hardly enough to make the difference...

...By 1976, according to Commerce Department estimates, exports absorbed 23 percent of all goods produced in the United States...

...Political conditions, among other things, are very different now...

...When growth stagnates, there is inevitably an outward thrust for new markets, and competition over existing markets intensifies...

...The deterioration of American hegemony is perhaps most visible in the crisis of the international monetary system...

...There has to be a means of settling international transactions acceptable to trading nations and certain rules about how accounts will be settled...

...Even if one nation has an advantage over others in producing all goods, it becomes richest by specializing in those goods which afford it the greatest advantage...

...Since the Second World War, there has been an explosion of international trade and investment quite unlike any former expansion...

...at the reference prices, they would be "dumping" steel on the U.S...

...was able to maintain the advantages it derived from the Bretton Woods system because it was the world's leading military and economic power...

...Shortly after, Carter revealed a complicated package of import restrictions and incentives to aid the ailing U.S...

...A "clean" currency float is designed to make these adjustments automatically through the market rather than according to the desires of governments...

...In conventional theory, an undervalued currency will stimulate a nation's exports by keeping the prices of its goods cheaper in terms of other countries...

...This is because the conservative belief that a devaluation automatically spurs exports and discourages imports has always been oversimplified...

...market...

...policymakers are, of course, fully aware that the dollar is still the world's number-one currency, in large part because the U.S...

...While its politicians preach about the evils of tariffs and trade wars, each rival nation moves to protect itself from imports which damage domestic markets, profits and jobs...

...In the past, solutions to these deep-rooted conflicts have ranged from wars and trade wars to extreme political authoritarianism...

...considerably over a three-year period...

...As Barry Bosworth, Director of the Council on Wage and Price Stability, once put it: U.S...

...In other words, die U.S...

...Nor have the West Germans and Japanese agreed to add much in the way of fiscal stimulus to reflate their economies...

...government's interpretation of Japan's costs of production...

...Instead, the U.S...

...was flooding the world with cheap dollars at the expense of its trading partners...

...economic storm," Business Week concluded that "as nations seek to protect their economic future in a world of shrinking trade, the floating rate system is today being subverted by degrees of government intervention in the currency markets that dwarf anything seen under the fixed-rate Bretton Woods system, when nations were required to intervene...

...These factors have required a certain amount of tolerance on the part of the other advanced /Countries, especially the U.S...

...While there have been innumerable international conferences and declarations on creating a new monetary regime, there has been little progress toward a lasting accord...

...In recent years, however, we have witnessed a startling turn of events...

...Strauss told reporters that sanctions against Japan were "imminent" unless Tokyo responded satisfactorily to Washington's demands...

...They reached an agreement which will reduce Japan's color television exports to the U.S...

...Consequently, the lack of investment opportunities and the availability of cash have led to a new orgy of speculation...

...First of all, in many product lines, the Japanese are simply the world's most efficient producers, which is why an increasing number of U.S...

...Since West European firms have higher production costs than Japan's, by selling steel in the U.S...

...demands...

...It has maintained a more closed economy than the U.S...

...A quota is erected here and a tariff there...

...In theory, everybody benefits from unrestricted trade...

...Even in the U.S., which has recovered faster than the other advanced countries, the large capital goods spending by giant corporations which characterized other postwar recoveries has simply not materialized...

...is viewed as the last bastion of capitalism, and they exploit this to the hilt...

...Indicating that the U.S...

...getting the best of two worlds In the 1930s, John Maynard Keynes believed that it was possible for nations to insulate themselves from the cutthroat competition for international markets and the depressive effects of conforming to the gold standard in order to pursue full employment policies at home...

...The much-heralded agreement which Strauss hammered out with the Japanese in January, in which they agreed to drop barriers to U.S...

...Since no single nation has the power to determine the rules of the game, managing the current system of floating exchange rates necessarily involves a great deal of cooperation on the part of governments...

...payments deficits and dollar outflows were due to war-related government spending, while now government deficits are supplemented by large deficits in merchandise trade...

...steel industry...

...Since the Second World War Japan has been unique among the advanced capitalist countries in several respects...

...Profits are then written into the average cost structure of an industry, according to a pre-determined "target" level of return...

...Now, with the worldwide economic recovery staggering before any pretense of full employment has been achieved, the possibility of a new trade war is greater than it has ever been...

...Though the yen rose dramatically during late 1976 and 1977, from the U.S...

...At a time when Michael Blumenthal and others are lobbying for increased tax incentives for new investments, and with millions of people out of work, some of the largest corporations, like General Electric, R. J. Reynolds, Gulf, and Pepsico are spending record amounts of cash to acquire choice subsidiaries...

...Firms will be able, at least for the time being, to sell all die steel they want at or above reference prices which will be calculated according to the U.S...

...This is called marginal-cost pricing...

...With the industries of Japan and much of Europe destroyed by the Second World War and the dollar enthroned as the accepted means of international commerce, the U.S...

...market and reduce it farther if possible...

...These conditions have unleashed a new corporate merger movement in the United States which is beginning to rival the massive conglomerate expansion of the 1960s...

...Even European firms are trying to get in on the action...

...At the root of the crisis is the disappointing economic recovery and the ensuing conflict among the leading powers for a larger share of the benefits of limited growth...

...Overseas production of U.S.-based multinational corporations is even higher than exports...

...This is a far cry from the U.S...

...of 1971, have been transitory, recent developments suggest that this time the threat is real...

...This method of limiting imports is in fact little more than a slap at Japan...

...Nations maiiuu.aed relatively high levels of employment and, led by the United States, pursued extensive policies of trade liberalization...

...Fair' trade, the American steelmakers contend, should be at prices that reflect average costs of production, plus a reasonable mark-up...

...In sum, it appears that Carter, Commonweal: 233 Humbled and destroyed after the war, European and Japanese firms had no alternative but to build new plants with modern technology...

...markets, which U.S...

...He also objected to their tight-fisted fiscal and monetary policies...

...Many of these corporations now depend on foreign operations for up to half of their total sales and earnings...

...Each nation (or region) which specializes in the production of those goods in which it has an advantage over other producers, becomes richer by producing and exporting those goods and importing goods which others produce more cheaply than they can be produced at home...

...The contraction of world trade led to still greater unemployment and actually worsened the Great Depression...

...An overvalued currency, on the other hand, raises the prices of one's exports and encourages imports...

...For years many Third World countries have attempted to expand their export of labor-intensive manufacturers...

...When that happens, investments are suspended and workers are laid off...

...Under the pressures of stagnant worldwide growth, persistently high inflation and unemployment, and higher oil costs, a 1930s-style trade war has threatened to break out among the world's leading traders: the U.S., the EEC nations and Japan...

...The EEC nations have joined the attack on Japan's huge trade surplus with its major trading partners, repeating the U.S...

...dollars, the Nixon administration, in August 1971, flatly broke with the Bretton Wood rules, and several attempts to patch up the old system have been limited in their effectiveness...

...At the Bretton Woods Conference of 1944, nations agreed to peg their currencies at par values to the dollar, which was henceforth considered as "good as gold...

...or Western Europe, with relatively high levels of protection and little foreign direct investment...

...deficit spending, and Vietnam War-related inflation, the old system became increasingly untenable...