CHAPTER SIX

Export Markets and Domestic Policies

PEOPLE IN JAPAN WOULDN’T BELIEVE ME when, in 1982, I told them that President Reagan would cut off American equipment for the gas pipeline from Siberia to Western Europe. “That would take world leadership for heavy earth-moving equipment away from Caterpillar and the United States and hand it on a platter to Komatsu and us Japanese! But earth-moving equipment is the one heavy industry with long-term growth potential. No government would do this!” Several of the usually superpolite Japanese came close to calling me a liar when I said that the impact on the competitive position of this major American manufacturing industry wouldn’t even be considered by the administration in making the decision. It wasn’t—and it couldn’t have been, given American political mores.

Similarly, the impact on the competitive position of U.S. manufactured goods wasn’t even discussed in 1981 in the decision to fight inflation primarily by raising interest rates, even though this meant pushing up the international value of the dollar and pricing American goods out of the world market.

For 150 years, ever since Andrew Jackson, it has been a “given” of U.S. politics that American manufacturing’s competitive position in export markets isn’t a legitimate concern of the policymaker.

It’s true that we have a long tradition of protecting our domestic market. Despite all our free-trade rhetoric, protectionism is as American as apple pie. And at least since the Civil War the competitive position of U.S. farm products in the world market has been a major policy concern.

Yet it has long been thought improper to consider the impact on manufactured exports when setting policy. Only one president in the last 150 years thought otherwise: Herbert Hoover. For all the rest, even the most “pro-business” ones, concern for manufactured exports was taboo. It meant “looking after the profits of the fat cats.”

For a long time this did little harm. Manufactured exports were at most of marginal importance, accounting for no more than 5 percent to 8 percent of output—and even less in our major industries. But this has changed drastically in the last twenty years. Politicians and economists still berate U.S. manufacturers for their “neglect of export markets,” and article after article implores the industry “to learn to sell abroad.” But the American manufacturing industry now exports more than twice as large a proportion of its output as Japan; indeed the export share of U.S. industrial production exceeds that of any major industrial nation except West Germany.

In part this is the result of American multinationalism. The subsidiaries and affiliates of U.S. companies, far from taking away American jobs, are the best customers of the domestic manufacturing industry. Part of the tremendous expansion of American manufactured exports is, however, the result of a very real change in the attitude and the competence of American business, especially of small and medium-size high-tech companies. As a result, exports of manufactured goods accounted in 1982 for one of every five jobs in U.S. factories.

Yet 1982 was not a good year for the exporter. Part of the cause was the world recession, but the major reason was the overvalued dollar. Fred Bergsten, former assistant secretary of the Treasury for international economics and now a consultant to private industry, reckons that a 10 percent lower dollar would have raised the level of American exports a full quarter higher than they were; exports would have reached almost one-fourth of a much higher U.S. manufacturing output. According to Mr. Bergsten, the overvalued dollar cost more American manufacturing jobs and created more unemployment than the crises in the steel and auto industries combined. The world market still means more to the American farmer than it does to the industrial worker: two-fifths of farm sales against one-quarter or one-fifth of manufactured-goods sales. But even in a year of poor export sales such as 1982, the world market was the largest single customer of American factory labor.

Under these conditions the traditional separation between American domestic policy and concern for the U.S. competitive position in the export markets for manufactured goods can no longer be justified.

There are three ways of building concern for our foreign trade into the policy-making process. The first—it might be called the internationalist one—is to make sure that the impact of any decision is carefully considered. This is essentially what the West Germans do, and today they are the closest to genuine free traders in industrial goods. It is one of the main jobs of the West German ministry of economics to work out an economic impact statement describing the foreign-trade consequences of proposed government policies. This doesn’t guarantee, of course, that other considerations are subordinated. I would guess, for instance, that the Reagan administration would have gone ahead with both its high-interest strategy and the ban on supplies to the Siberian pipeline even if it had considered an economic impact statement on each. But at least the “internationalist” position ensures that international competitiveness won’t be sacrificed or damaged unthinkably and by default.

The second way to build concern for competitive strength into policy-making might be called the nationalist position. It holds that a political decision shouldn’t weaken competitive economic strength in the world market; on the contrary, whenever possible, it should strengthen it. This is essentially the line General De Gaulle took when he ran France. Like all believers in realpolitik from Richelieu to Henry Kissinger, the general didn’t put a high priority on economics. “Money,” the realpolitiker has always believed, “grows out of the barrel of a gun.” Yet in every major decision De Gaulle carefully searched for the solution that would enhance France’s competitive position in the world economy or at least not damage it.

Third, there is the mercantilist position: strengthening the competitive position of the country’s manufacturing in the world market is the first priority in public policy, to which other considerations are normally to be subordinated. De Gaulle’s conservative successors, Pompidou and Giscard d’Estaing, held this view: it has been the traditional French position since the seventeenth century. But the real pros today are the Japanese.

Clearly these positions overlap. No country has ever followed one of the three exclusively. Also not every one is equally accessible to every country at all times. The mercantilist stance, for instance, is almost incompatible with great-power ambitions, which is why De Gaulle, with all his respect for French traditions, did not embrace it. And only the first, internationalist one fits easily with a free-market economy and fits United States needs and political realities. Even that policy would be a radical break with American political traditions; it would require substantial changes in the policy-making process and in our institutional arrangements, such as congressional committees.

However, we shall have to realize that safeguarding competitive economic strength is a legitimate concern of the policymaker and needs to be built into the policy-making process. With a fourth or a fifth of all manufacturing workers dependent on exports of manufactured goods for their livelihood, protectionism no longer protects. It only aggravates industrial decline and creates unemployment. But if a major country like the United States loses competitive strength in the world market, it is almost bound to become increasingly protectionist, however counterproductive this may be. It is high time that, breaking the habits, rhetoric, and traditions of 150 years, we build concern for our foreign position in manufactured goods into our policy-making process.

(1983)