Campaign Issues Trade: Getting Back into the Game

When the spotlight shone on Seoul, Americans focused their attention on the efforts by U.S. Olympians to outpace rival athletes from other nations. But there is another form of international competition that the U.S. is unquestionably losing, and it is no game. America, once the perennial champion of world trade, now seems in danger of dropping out of contention. In one industry after another, American companies have lost their lead to foreign competitors that are more innovative, efficient and responsive to the needs of consumers.

The stark facts are revealed each month in the trade-deficit figures. Despite recent improvement, the U.S. still imported $80 billion more in goods than it exported in the first seven months of the year. At the current rate, the 1988 trade deficit will total some $130 billion, 23.5% less than last year’s record $170 billion. That progress has resulted primarily from the 40% drop of the dollar against major currencies since early 1985, which has made imports more expensive and U.S. exports a bargain overseas.

Considering the size of the dollar’s decline, the improvement in trade figures has been surprisingly small. The sad truth is that American industry simply is not in good enough shape to take advantage of the weak dollar. Many companies have trouble matching the quality of products from abroad. Other firms are running into production bottlenecks because they have skimped on investment. Some industries have been virtually wiped out by foreign competition: the share of the U.S. consumer electronics market held by American companies has plunged from almost 100% in 1970 to less than 5% today. When the Japanese started coming up with innovative products like VCRs and hand-held video cameras, U.S. firms decided to sell Tokyo’s models rather than try to make their own. In short, U.S. industry no longer has the capacity to produce the quantity, quality or variety of goods that the public demands.

The easy explanation, and the one that Michael Dukakis has been hinting at with his economic nationalist talk, is that U.S. companies are the victims of unfair foreign trade practices. Japan, in particular, is accused of erecting barriers against American imports and of “dumping” products in the U.S. at prices that are below the cost of manufacture. The only response, the argument goes, is to protect American industry with quotas and higher tariffs.

While supporters of this position often resort to hyperbole and jingoistic rhetoric, their case has an element of truth. The U.S. cannot always stick to the rules of free trade when other nations do not. At times, it may be advisable to impose temporary protectionist measures as a bargaining chip.

But that weapon should be used sparingly. Protectionism encourages U.S. companies to remain inefficient and drives up prices to consumers. The flap about fair trade obscures an inescapable fact: the fault for our industrial woes lies not with our trading partners but in ourselves. If every trade barrier on earth magically disappeared, the U.S. deficit would probably decline no more than 20%. The primary responsibility for the trade deficit rests both with a profligate Government whose tax and spending policies have encouraged overconsumption and with much of U.S. industry, which grew fat and complacent during its halcyon days in the 1950s and 1960s.

Japan sets aside 21% of its gross national product for investment, according to the Council on Competitiveness, a nonprofit group headed by Hewlett-Packard president John Young. For the U.S., the comparable figure is only 12%. While underinvestment is a chronic U.S. problem, it has been exacerbated by the enormous budget deficit. That fuels consumption and, by absorbing capital, makes it more expensive for industry to raise money for investment.

But much of the blame for underinvestment belongs to corporate America. Too many chief executives are less concerned with the exacting details of manufacturing quality products than they are with making deals and dressing up the balance sheet. The entrepreneurs and engineers who once headed many companies have largely given way to finance and marketing types, who go for short-term profits at the expense of long-term investment.

Thus the U.S. is in danger of losing its technological edge. Nearly half of U.S. patents are granted to foreigners. One reason, says the Council on Competitiveness, is a lack of productive research and development expenditures. While the U.S. spends more on R. and D. than any other nation, nearly a third of the money goes to military projects, which have little commercial value. When Pentagon-sponsored research is excluded, the U.S. spends 1.8% of its GNP on R. and D., compared with 2.8% for Japan.

But bolstering R. and D. will not by itself ensure an increased flow of innovative American products. The best research will have no commercial impact if companies fail to take good ideas from the drawing board to the assembly line. Americans invented the technology behind VCRs but then sat back and watched (so to speak) as the Japanese adapted the machines to home use.

Such failures will be repeated unless U.S. industry attracts more talented people interested in product design and manufacturing techniques. That is not easy, given the graduates that universities put out. While there is no dearth of would-be lawyers, graduate engineering programs go begging for students. As many as 1,500, or 7.5%, of the engineering faculty posts at U.S. colleges are vacant. Many business schools put little emphasis on manufacturing and industrial management.

No President can single-handedly make up for the failures of industry and education, but the next Administration can create a better climate for spurring innovation. Realizing the urgency of the challenge, both George Bush and Michael Dukakis have made “competitiveness” one of their buzz words. But behind all the rhetoric is little specific substance and virtually no political courage.

Ignoring the unpleasant fact that the trade deficit has ballooned during Ronald Reagan’s watch, Bush proposes to continue the same basic policies: low taxes, high defense spending and less regulation of business. He pledges new Government support for education and research, but does not specify where he would get the revenue to pay for such programs. Bush hopes to balance the budget with a “flexible freeze” on spending.

Dukakis promises more Government money for education, worker training and the rebuilding of the nation’s decaying highways, bridges and transit systems. He calls for a modest $500 million Fund to Rebuild America to provide Government grants for regional economic development. Like Bush, Dukakis glosses over the issue of where the money would come from. He rails against big mergers as anticompetitive, chiding former Attorney General Edwin Meese for not knowing the “difference between antitrust and antifreeze.” Yet many trade experts believe that a relaxation of antitrust rules is necessary to allow U.S. companies to combine forces against foreign competition. Dukakis favors tougher enforcement of safety and environmental regulations, along with compulsory health insurance for workers that would be funded by companies. These are all worthwhile goals, but they will impose new costs on business, which, unless they are offset by new federal tax breaks, will hurt competitiveness.

Of the two candidates, Dukakis veers closer to being protectionist. He would grant ailing industries temporary relief if they use the breathing space to make necessary adjustments, including investments in plant, equipment and worker retraining. Counters Bush, who bills himself as a defender of free trade: “To some, competitiveness means protectionism and pointing the finger at our trading partners without trying to improve quality and productivity at home. To me, that is not competitiveness. Instead, that is weakness and defeatism.” But Reagan has agreed to trade restrictions on everything from motorcycles to semiconductors, and a President Bush would probably be just as pragmatic.

Neither candidate’s program will do much to curb the trade deficit. The problem cannot be resolved quickly, but several strategies could get the country moving in the right direction:

— Adopt a plan to eliminate the federal budget deficit. The candidates’ failure to face up to the budget issue destroys the credibility of their suggestions for improving competitiveness. Without this essential first step, no other remedies will work.

— Stimulate investment and civilian research and development. The investment tax credit, which was eliminated in the 1986 tax-reform act, should be restored — as long as consumption taxes are levied to make up the revenue loss. Companies should receive credits for investments not only in plant and equipment but also in human capital, like spending on worker training. Perhaps a third of the Pentagon’s research and development should be gradually shifted to projects with commercial value.

— Bolster education, with special emphasis on science and engineering. Everyone agrees that U.S. industry will have an increasingly tough time putting out quality products in a high-tech age if workers are poorly educated, or even illiterate. The Government should provide loans to help school systems revamp their facilities, and federal educational programs like Head Start should be expanded to include all disadvantaged children. Washington should give special grants to universities to subsidize increased salaries for science and engineering professors and scholarships to attract students into those fields. Moreover, the Government needs to launch a ten- year program to refurbish the research labs at the nation’s universities. That job would cost an estimated $10 billion.

— Curb corporate raiding. Dukakis has latched on to an important issue, but he is wrong to talk as if all mergers and acquisitions are equally bad. Friendly combinations may improve U.S. competitiveness. The more disturbing deals are the hundreds of hostile takeovers carried out by raiders financed with junk bonds. No wonder corporate executives focus on short-term profits and their companies’ stock prices if they constantly have to look over their shoulders for a raider. Even worse, hostile takeovers often saddle the target companies with huge debts that make them weaker than they were before the raid. The solution is not to ban all hostile takeovers, which would allow some ineffective chief executives to remain entrenched for life. But the Government could put restrictions on the amount of debt that could be accumulated to finance takeovers. In addition, the tax deductibility of interest payments on that debt could be limited.

Improved Government policies can only make a start on solving the trade dilemma. What is needed is a change in national direction. Long ago, Henry Ford lost his appeal as a role model, and interest in manufacturing faded. Services became the wave of the future, and law and investment banking became the prestige careers. America is paying the price for the increasingly unproductive orientation of its top talent.

Getting many of the smartest students interested in manufacturing will require a broad recognition that the U.S. does not live by services alone. The job of changing career goals will have to start with parents, high school guidance counselors and university administrators. Americans cannot go on increasing their standard of living without learning once again how to roll up their sleeves and make the products they want to consume.