Eye For Eye, Tooth for Tooth

Suddenly the specter of an all-out trade war between the U.S. and the twelve- member European Community loomed larger than ever. In Palm Springs, Calif., where President Reagan was vacationing, U.S. Trade Representative Clayton Yeutter announced last week that the Administration was prepared to slam the door by Jan. 30 on more than $400 million worth of West European imports, including Italian white wine, French cognac and British gin. The Europeans came right back with threatened new barriers against such U.S. products as corn-gluten feed, soy cakes, rice and almonds. Yeutter spoke darkly of possible “major disruptions in international trade.” In Paris, a French trade minister warned that Europe would respond “eye for eye, tooth for tooth.” He also accused the U.S. of “choosing the Rambo method” for resolving the issue.

That metaphor seemed inexact: no shots, after all, had yet been fired by either side. Even so, it seemed that brinkmanship, usually a negotiating tool among enemies, had become the dominant form of discourse between the U.S. and many of its important friends. The brandishing of threats and deadlines also marred U.S. trade relations with neighbors to the north and south. As the European row erupted, U.S. negotiators announced that they had solved — almost — a festering softwood-lumber dispute with Canada. Meanwhile, the Administration postponed for at least six months yet another major trade confrontation, this time with debt-laden Brazil. The trouble: stymied U.S. access to that country’s computer and information industry.

Why all the fuss over trade right now? Deadlines in the various negotiations happened to coincide, but the actions also reflect continued U.S. frustration over its trade deficit. In November the U.S. recorded its worst monthly deficit ever: $19.2 billion, up from $12.1 billion in October. U.S. officials pointed out that extraordinary factors were involved, including the rush of consumers to buy imported items like autos before tax reform eliminated sales-tax deductions. Said U.S. Under Secretary for International Trade Bruce Smart: “We remain confident that 1987 will see a significant improvement.” Maybe so, but the November figure meant that the 1986 deficit was running at an annual rate of $173.5 billion, up 17% from the previous year. The Administration is eager to confront the trade issue before Congress decides to pass sweeping protectionist legislation.

The origins of the European trade dispute go back a year, to the entry of Spain and Portugal into the European Community. With that move, Spain embraced highly protectionist E.C. farm policies that included prohibitive levies of up to 200% on U.S. corn and sorghum exports. The action effectively closed those Spanish markets, worth an estimated $400 million to American farmers. Under the rules of the General Agreement on Tariffs and Trade, a 92-member treaty, Washington demanded compensatory access to overall E.C. markets for the same goods. The Europeans recognized the U.S. right to compensation, but then refused to take action, arguing that increased U.S. manufactured exports to Spain would eventually make up for American losses.

As far back as last May, Washington threatened to retaliate with equally prohibitive 200% tariffs against a range of European products. They include not only liquor but such necessities of yuppie life as Gouda cheese and canned ham. (The price of Gouda, for example, would virtually triple, to around $30 per lb.) The cheap wines and pricier cognacs that the U.S. has targeted are worth an estimated $250 million annually to French and Italian exporters; the British gin trade would be socked for $70 million more. After the tariff threat was raised, some progress was made in resolving the issue, but then talks stalled once again.

While trying to sound as tough as possible, Trade Envoy Yeutter made clear that the U.S. still prefers peace with its European allies to a trade war. Even if Washington’s agricultural retaliation takes effect, Yeutter emphasized, “it will still be a small portion of overall ((U.S.-E.C.)) commerce.” True enough: overall trade between the two sides amounted to more than $120 billion in 1985.

Washington can point to the resolution of the U.S.-Canadian lumber tiff as a victory for its tougher trading stance. The lumber issue boiled up in October, when the Commerce Department announced a Dec. 31 deadline for formal imposition of a 15% duty on Canadian softwood, which took up 32% of the $9 billion U.S. market in 1985. The U.S. argued that Canada unfairly subsidized the exports. Rather than face the U.S. duty, Canada proposed its own 15% export tax, which is expected to hike the cost of the average new U.S. home by about $1,000. The U.S. agreed to that solution, but since the Canadian tax will not take effect until at least Jan. 8, Washington has still imposed its own 15% tariff as an interim measure.

Washington’s attitude toward Brazil is “wait and see.” For more than three years the U.S. has objected to Brazil’s protectionist policy toward its computer and data-processing industry. Foreign investment is effectively banned, and protection of U.S. copyrights on items like computer software is not adequate. The U.S. Commerce Department claims that the restrictions cost American firms between $337 million and $452 million a year. Now the Brazilians argue that they are willing to make concessions, and the U.S. will give them until July 1 to do so.

In the end, trading harmony on all fronts may be restored. What is troubling, however, is the prospect of what might happen if it is not. As most students of history remember, a worldwide trade war helped deepen the Great Depression of the 1930s.