Coming Trade Wars?

(Neo-Mercantilism and Foreign Policy)

Author(s): Harald B. Malmgren
Source: Foreign Policy , Winter, 1970-1971, No. 1 (Winter, 1970-1971), pp. 115-143
Published by: Slate Group, LLC

Stable URL: https://www.jstor.org/stable/1147892

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 COMING TRADE WARS?
(NEO-MERCANTILISM
AND FOREIGN POLICY)

by Harald B. Malmgren

Commercial and financial issues are starting

to replace traditional diplomatic and security
questions as the main stuff of foreign policy.
This shift in priorities is in part a consequence
of the receding threat of war between the
superpowers. But, just as important, a sweep
of world-wide economic adjustment is also
under way, changing the framework of inter-
national politics.
Two-thirds of the world's people live in the
developing nations, and by the year 2000, this
ratio is expected to rise to about five-sixths.
The political outlook for these countries
and their relations with the developed world
depend heavily on economics. For the polit-
ical issues of development are mainly eco-
nomic issues. Income growth is the developing
world's political imperative, affecting the fate
of its political leaders, bringing about changed
trade and financial flows, and dominating
diplomacy between rich and poor countries.
More immediately, there is a fundamental
change in economic relationships among the
major powers. The United States is no longer
the world's largest trading unit, for the
European Economic Community (EEc) has
surpassed it, even excluding internal trade
among the six members. If Britain and others
join the EEc, economic power relationships
will shift more quickly and massively. Mean-
while, Japan is moving up fast. World trade
is growing faster than Gross National Prod-
uct, and investment flows are altering the
shape of national interests. Trade itself is
becoming increasingly sensitive to changes in
national economic conditions. As Richard
Cooper wrote two years ago, "Transportation
costs have fallen somewhat, tariffs and other

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 barriers to trade have fallen much more,
'horizons' have broadened to provide greater
receptivity to foreign goods." Cooper added,
"the accumulation of capital and the inter-
national transmission of technical knowledge
have caused a convergence in the potential
structure of production in industrial countries
so that national advantages arising from
climate, resources, or unique technological
skills are less successful in insulating a country
from foreign competition than they once
were."'
These trends have made trade and financial
questions more politically explosive. National
economies increasingly depend upon inter-
national mechanisms for adjustment which
can help them to weather shifting patterns
and levels of trade, without having to resort
to extraordinary restrictions.
Many governments have not yet faced up
to these slowly evolving but powerful forces
of economic change. In the U.S., contrary to
the theorizing of the American New Left,
international economic issues rarely hold the
high level attention of foreign policy-makers.
Foreign economic policy is still considered a
tedious and technical subject in the upper
reaches of Washington officialdom. The
broad policy consequences of economic ac-
tions are hardly ever considered by Secretaries
of State. Presidents never give international
economics anything like the time and atten-
tion they devote to military and diplomatic
problems. This lack of high policy level atten-
tion to shifting economic forces has already
allowed some major problems to erupt into
conflict, while others fester. It has also per-
mitted, and even encouraged, the strengthen-
ing of domestic special-interest groups within
a number of countries, which work against
international cooperation. One current ex-
ample is the Japanese textile crisis.
The breakdown of U.S.-Japanese negotia-
tions on textile trade in 1970, followed by a

'Richard N. Cooper, The Economics of Interdepen-

dence (New York: McGraw-Hill, 1968), p. 80.

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 flurry of Congressional activity to shape re-
strictive import legislation, was not a minor
technical slippage in our commercial machin-
ery. It was a confrontation in basic foreign
policy which arose over economic issues. The
textile trade had become a political hot potato
in Japan months before the breakdown.
Parliamentary debate and public discussion in
Tokyo focused on such questions as whether
Japan should again, as so often in the past,
capitulate to U.S. pressure, whether doing so
put an unacceptable strain on Japan's export
economy, and whether Japan should not
reduce its ties to the United States and turn
more toward the Asian sphere and China.
Two key politicians, Foreign Minister Aichi
and International Trade and Industry Min-
ister Miyazawa, threatened to resign over the
U.S.-Japanese confrontation.
The American position was that Japan
must limit its exports of textiles to the U.S.,
even though this was a violation of Japan's
rights under the international trading rules of
the General Agreement on Tariffs and Trade
(GATT). The reason: President Nixon had
committed himself during the 1968 election
campaign to provide import relief for the
American textile industry.
Spokesmen for the United States explained
that there was no problem with imports from
Europe, and that therefore there was no need
for restrictions in that quarter. The problem
lay in Asia, more specifically in Japan,
Taiwan, Korea, and Hong Kong. In the long
run it was expected that such countries as
Singapore, Malaysia, and the Philippines
would also fall into the problem category.
Consequently, the issue blossomed into a
yellow-skin discrimination question, further
inflaming Japanese opinion.
The issue was a major one in Tokyo, but
Washington hardly seemed to notice. For the
U.S. President, a minor campaign commit-
ment was at stake. For his foreign policy
bureaucracy it was a boring trade problem
which somehow had to be solved in order to
get on with more important issues such as

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 when Japan was to get Okinawa, and under
what conditions.
When the bilateral talks reached an im.
passe, President Nixon endorsed legislative
import restrictions on textiles. Congress,
given license to indulge its protectionist mood,
then began to move on a trade bill. Editorial-
ists evoked the specter of the high Smoot-
Hawley Tariff of 1930, as legislators considered
erecting new trade barriers not just for textiles
but also for many other products. Part of the
reason for this was frustration with the import
and foreign investment restrictions of the
Europeans and the Japanese, which have an
adverse effect on the United States. Much of
it reflected growing Congressional concern
over unemployment, especially over the pos-
sible labor-displacing effects of imports from
low-wage countries. In textiles, the allegation
was that labor in the South, especially black
labor, would be damaged by imports from
Asia. Our regional economic and social
policies required, it was said, protection of the
U.S. textile industry. The same argument was
then made for protection of the shoe industry
and many others.
This problem was more general than it
appeared. In the past year the AFL-CIO, altering
its historic position, came out against free
trade in many product areas. The unions even
voice opposition to the free movement of
capital, criticizing U.S. government policies
toward multinational companies as too per-
missive. Labor fears that large American
companies may move their production facil-
ities to Asia and other developing nations to
obtain cheaper labor (the "runaway mill"
problem). Even where companies stay home,
there is apprehension that labor-intensive
imports will slow the expansion of investment
in new job creation.
This turnabout has pitted a labor problem,
a vote problem, and a political commitment
problem on the U.S. side against an issue of
national importance on the Japanese side,
reopening for discussion the foreign policy
orientation of a major ally. The European
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 countries, now strong enough to take an in-
dependent stand, have tended to side with
Japan, warning the United States of the
serious consequences of evading the GATT
legal framework. Over time, they argue, the
U.S.-Japanese dispute could escalate to a trade
war with many countries, as restrictions are
piled upon restrictions. Europeans interpret
the U.S. position as an attempt to pass a do-
mestic electoral debt along to other countries.
Neo-Mercantilism

What we are witnessing today is the funda-

mental clash of national policies which are
primarily oriented toward solving domestic
political and social problems. These policy
clashes also existed in the past, but were
softened by at least two mitigating factors.
First, there was a continual effort after World
War II to negotiate internationally in trade
and monetary affairs, which produced a series
of successful agreements to reduce trade
restrictions and to improve monetary co-
operation. Second, the political impact and
attention toward foreign policy of interest
groups such as organized labor and farmers
was minimal. These limiting circumstances no
longer exist. Multilateral discussions are at a
standstill. There has been a rise in mercan-
tilist sentiment in most of the world, while
the present and future role of labor, farmers,
and special interest groups has become in-
creasingly important. Now businesses, work-
ers, and farmers in all countries expect their
governments to manipulate national econo-
mies to ensure full employment and pros-
perity. Where conflict arises with another
country's interests, the domestic economic
requirements are expected to prevail.
Historically, mercantilism is associated with
pre-industrial Europe, though as a guiding
doctrine it was practiced in many states for
centuries.2 It was a conception of the role

'The classic study is the two-volume work by Eli F.

Heckscher, Mercantilism (London: Allen & Unwin,
1935). My description of mercantilism here is highly
simplified.

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 of the state that involved manipulation of the
economy, but manipulation through reducing
imports, stimulating home production, and
promoting exports. It was thus a highly
nationalistic conception of how governments
should act. Its historic strength and support
was finally balanced, if not toppled, by the
advent of laissez-faire philosophy and inter-
nationalism.
Today, we are seeing a resurgence of mer-
cantilism, whereby governments meet domes-
tic economic demands with conscious policies
of manipulation, passing the costs of these
policies as much as possible onto other
countries. This neo-mercantilism is a pro-
foundly disruptive force in international re-
lations. It takes many forms.
The Common Market Wall

In Europe, the Six have managed to forge

a reasonably effective economic union. Their
major achievement, however, is not in estab-
lishing new political institutions, but rather
in consolidating European agricultural pol-
icies. This has been no mean achievement,
for until recently farm policies varied widely
from government to government. European
agriculture had become a serious social and
political problem in certain regions. Any
economic program had to include policies for
caring for the needs of rural families engaged
in farming. The answer was found in a new
and ingenious system called the Common
Agricultural Policy (CAP). Incomes were to be
maintained and increased by supporting
prices at high levels, without any production
controls. Then, to prevent imports by cheaper
suppliers from spoiling this supported market,
import levies were to be assessed in an amount
sufficient to bring the price of imports up
slightly above domestic price supports. Im-
ports thus became residual, filling needs in
excess of domestic supplies.
Since EEc price supports were extremely
high relative to world market levels (roughly
twice as high for the major commodities), and
since technological change relentlessly pushed

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 up productivity, production was stimulated.
To avoid or reduce enormous surpluses in
some commodities it was necessary to export,
but exporting was out of the question at these
high internal prices. Therefore the system had
to provide export subsidies to the extent
necessary to meet world competition at world
market rates. The import levies were used to
finance the export subsidies. The result was
the ultimate in mercantilism: decrease in im-
ports, stimulation of home production to
substitute for imports, and increase in exports.
The reason for building this mercantilist
machine was simple enough. Economic union
would not be possible without a deal between
France and Germany. France had farm pro-
grams in need of support, and Germany had
industrial products it wished to sell in France.
Germany was willing to pay in agriculture for
better industrial access, and besides, German
farmers were very strongly in favor of high
prices for their products. Thus internal polit-
ical problems of social policy and rural and
regional development were solved. To the
rest of the world, particularly to efficient farm
producers like the United States, the impact
of the system has been costly. One effect has
already been a drop of 40 percent in U.S.
exports of CAP-protected products to the EEC
over the last three years. The CAP system
began to function in 1966-67, and protection
now is roughly triple what it was at the
beginning of the 1960's.
The direct economic damage to others goes
even deeper. The highly subsidized prices of
the EEC have become a source of intense
downward price pressure on other agricultural
exporters. This has caused great economic
and political pain to smaller exporting coun-
tries like Denmark and New Zealand, and the
beginnings of real trouble for larger ones like
the United States. The new EEC agricultural
system is a throwback. It is an explicit com-
mitment to mercantilism as a way of life,
having broad policy consequences for all
trading nations. Even major importing coun-
tries are affected, as their own farmers feel the

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 increased pressures of imports diverted from
other markets to their own, and sold at
depressed prices.

Agrarian Reformers

The EEC is not alone in its tendency toward

further trade distortions in agriculture. The
Japanese, protected by a series of quantitative
import restrictions inconsistent with the GATT,
and holding to a support level for rice triple
the world market price, are faced with a
rapidly increasing rice surplus and mounting
budgetary costs. This creates pressure to main-
tain import restrictions on other temperate
commodities in order to stimulate diversifica-
tion. Japan is now trying to unload some of
its mountain of high cost rice in the form of
food aid, disrupting the rice markets of devel-
oping country exporters. Denmark, squeezed
by widespread subsidization in world markets,
has adopted a Home Market Scheme, a
euphemism for export subsidies of its own.
Australia and Canada have felt similar pres-
sures, particularly in declining wheat prices
during the last year (witness the political
turmoil in Canada's western provinces). This
was a result, in part, of past unwillingness by
the Canadian and Australian governments
and wheat producers to recognize that they
must share in controlling world production
by restraining their own output, or else face
general deterioration in world grains prices,
in spite of the International Grains Agree-
ment provisions to the contrary.
The United Kingdom has also turned to-
ward increasing protection, justifying each
move in terms of balance-of-payments con-
siderations. Both political parties in the U.K.
advocate increased self-sufficiency in agricul-
ture. An Economic Development Committee
for Agriculture was established to develop
import-saving policies which stimulate home
production. Introduction of an EEc-type pro-
tection system is imminent. While there have
been some difficulties in moving toward more
self-sufficiency, and the costs are high both to
the government and the consumer in the

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 United Kingdom, there is no doubt about the
direction of British policy.
The entry of Britain into the Common
Market will almost certainly reduce imports
from third countries, and provide a new
market for the painful surpluses of the Six,
easing any pressure for reform at least for a
time. The entry of Denmark, a strong agri-
cultural exporter already, will compound the
difficulties for third countries.
These developments in the major com-
mercial markets come at a time when the
developing nations are finally able to step up
their rates of agricultural growth as a result
of the Green Revolution in rice and wheat.
Some of these nations are not only becoming
self-sufficient, but are also pinning hopes on
potential commercial exports. This is happen-
ing at the very time when the developed coun-
tries are pressing each other's prices downward
through protectionism, artificially stimulated
production, and export subsidization.
The Director-General of the GATT said
recently, "The situation now seems to have
reached alarming proportions and to be
already out of proper control." He was speak-
ing of the whole of world agricultural trade.
Recent trends bear out this bleak assessment.
What are the political implications?
Most U.S. farm organizations are export
minded, and therefore supporters of freer
trade. They have for many years exerted ef-
fective pressure to block protectionist moves
in the U.S., and have been a crucial element
in every coalition that has fought for trade
liberalization. Alienation of the farm bloc,
in addition to the recent shift of the AFL-CIO,
means the end of the political balance in
America which used to favor outward-looking
trade policies. This erosion of the domestic
political base has significant side effects.
Agricultural export problems disturb men in
Congress who must also vote on overseas
defense expenditures. The export question
hits them directly because it harms their con-
stituents, and gives them a sense of insult
added to injury: Europe not only does not

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 pay its own way in defense, but also artificially
undercuts America's best export growth per-
formers, agricultural commodities. The senti-
ment has a certain logic, and powerful
implications for the future of Atlantic
relations.
Another political implication of EEC farm
policy is its effect on the policies of other
countries. Recently the Mediterranean na-
tions have all found it necessary to negotiate
special discriminatory, bilateral trade agree-
ments with the EEC to insure access for certain
products, particularly in agriculture. This
adds to an already considerable network of
special bilateral arrangements between the
EEC and most of Africa, Greece and Turkey.
Even Israel is inside the discriminatory system.

Geo-economics

The EEc-Mediterranean preferences have

damaged some U.S. citrus exports, but the
basic policy problem cuts deeper. Preferential,
discriminatory trading arrangements have
been concluded for the self-admitted reason
that they seem politically necessary. The most
serious problem they raise is the precedent
they set for the future. As EEC enlargement
takes place, the question will arise as to
treatment of the remaining EFTA* countries,
and of the Commonwealth, and of U.K.
dependencies (e.g., the Caribbean). The ten-
dency will be to negotiate even more special
arrangements. Growing like Topsy, a geo-
economic system which favors members and
damages outsiders will be formed-a special
system which is no longer so special. That it
leaves Latin America for the United States
to look after is only one problem. An even
greater difficulty lies in the exclusion and
eventual alienation of Asia. This European
system will dominate world trade statistics,
leaving the rest of the world to become a
series of "special cases."
Taking into account the likely trade damage

*European Free Trade Area (present members are:

Austria, Britain, Denmark, Norway, Portugal, Sweden
and Switzerland).

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 to the U.S. if European policies move further
in their present direction, the traditional
American support for European enlargement
and unification is bound to be reassessed. A
united Europe has been a long-time objective
of U.S. policy, but the purposes of this unity
were to help stabilize international relations,
share the burdens of Western security, co-
operate in managing the world economy, and
assist the development of poor countries.
In 1966 J. Robert Schaetzel, our present
Ambassador to the Common Market, wrote:

Over the full range of contemporary foreign

affairs, American policy toward Western
Europe has been marked by durability and
rare continuity. The change of neither
Presidents, Secretaries of State nor political
parties has altered the lines of basic policy.
The government marches with American
public opinion, for that ubiquitous man in
the street still feels deeply that Western
Europe is vital to the United States.3

This view expressed itself in the 1960's in the

policy of "partnership," the goal of close co-
operation between trans-Atlantic equals. A
spokesman for this course, Schaetzel warned
that it would not always be a smooth one:

The sheer magnitude and novelty of the

task of unifying Europe will preoccupy the
Europeans. Caught up in these affairs, their
governments will be less inclined, at least
in the short run, to give attention even to
what they would agree are common prob-
lems, or to give an equal priority to urgent
international questions.

What was not adequately foreseen was that

Europe all the while was tending to consoli-
date an enormous economic club which not
only ignored, but actively discriminated
against the United States, and even against
most of the developing countries. By con-
scious design or otherwise, this is how the
Grand Design is evolving today. Trade dis-
crimination may be a way for Europeans to
demonstrate the end of U.S. tutelage, the

3]. Robert Schaetzel, "The Necessary Partnership,"

Foreign Affairs (April 1966).

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 answer to U.S. dollar domination through
direct investments. Whatever the motives, the
consequences are highly disruptive and dam-
aging. American diplomacy in the 1960's
never really coped with these problems, but
focused instead on NATO political-military
issues, which were of declining interest for
most Europeans.
On the western side of the Atlantic, when
outward-looking economic policies and multi-
lateral initiatives to head off discrimination
are urgently required, the United States in-
stead seems to be reverting to a neo-mercant-
ilism of its own. The symptoms first revealed
themselves in the balance-of-payments pro-
gram of the 1960's, aimed at earning more
while paying out less abroad. Many of these
Kennedy and Johnson Administration meas-
ures were crudely mercantilistic, but they
probably did not have great impact in practice
(although the investment controls did relieve
some apprehensions in Europe about Amer-
ican investment domination). The countries
most affected were the developing countries,
through aid-tying, "additionality," direct-
investment restraints, and the decline in
Congressional appropriations for foreign
assistance.

From Beef to Steel

During the Kennedy Round, the greatest

trade liberalization effort in history, protec-
tionism was held back by the momentum of
international negotiations authorized by the
1962 Trade Expansion Act. In 1967, when the
negotiations were concluded, protectionist
sentiment in Congress suddenly rose sharply.
From that time to this, there has been a major
push to restrict imports of textiles, shoes,
steel, beef, and many other products. Inter-
national political relations have been strained
by U.S. diplomatic pressures on other coun-
tries to limit their exports voluntarily in order
to head off restrictive trade legislation.
Beef exporters in Australia, New Zealand,
and Latin America have accepted such in-
formal limitations. In steel, foreign govern-

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 ments have turned a deaf ear, but foreign
companies proved less stubborn, and a
steel producers' voluntary export restraint
agreement has emerged "spontaneously."
Pressures for greater textile restrictions con-
tinue. In dairy products, a tight import quota
system keeps imports from exceeding one per-
cent of the total American market.
These developments, and others, have
angered our trading partners. The situation
seems, no doubt, surrealistic to some Ameri-
can diplomats. After all, export of beef or of
milk is not a major issue of foreign policy-
or is it?
The Australian government answered the
question by pointing out that its troops in
Vietnam cannot be paid for if Australia is not
permitted to earn its way in exports. When
Nelson Rockefeller visited Latin America on
his 1969 mission, the major political issue
raised throughout the continent was that of
American trade restrictions, particularly in
beef and textiles. More recently, Brazil has
been threatening to reassess its entire eco-
nomic relationship with the United States if
we insist on restraining its quite modest
cotton textile exports. In steel, the Commis-
sion of the EEc has been furious that a
nongovernmental restriction program wa
established at U.S. instigation, in disregard
of international rules and of political relations
between governments. In agriculture, most
countries have agreed that our dairy quotas
are so excessively strict as to be absurd, which
undermines our case against the damaging
agricultural policies of others. Finally, th
failure of Congress for such a long period
after the Kennedy Round to repeal the in-
famous American Selling Price legislation
even though it was negotiated as a separate
trade deal during the Kennedy Round, made
many Europeans feel that negotiating with
Americans was a waste of time.
The political repercussions of these neo-
mercantilist policy changes spread slowly, but
they spread inevitably. Because they involve
special interest groups, companies, workers,

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 and farmers, their political effects are far-
reaching and persistent. Unless high Wash-
ington policy-makers start paying more
attention to economics, the problems ahead
will be amplified.

The Rich and Poor

They will be especially painful in relations

with the developing world. At the close of
the 1960's a number of reviews of the progress
of the developing countries were set in mo-
tion. For preparation of Development Decade
II, the group of "wise men" under Professor
Tinbergen was formed. For the World Bank,
the Pearson Commission prepared a report.
For the Inter-American Development Bank,
Raul Prebisch completed a survey of Latin
American problems and prospects. In Wash-
ington, the President's Task Force on
International Development made its recom-
mendations.
This many-faceted appraisal revealed sev-
eral fundamental problems. During the 1960's
the developing countries performed, on the
average, better than anyone expected, grow-
ing at 5 percent per year. In the face of
population growth, however, their per capita
income grew by only half as much, and the
income gap between rich and poor countries
widened. The reports concluded that growth
could be somewhat accelerated if the external
flow of aid resources was increased. Among
the recommended measures: official aid should
be raised in each donor country to 0.70 per-
cent of GNP (Pearson) or 0.75 percent (Tin-
bergen), and private investment flows should
also be raised. The greatest stress was placed
on trade: "The first requirement for rapid
international development is continued vig-
orous expansion of world trade."4 Since trade
accounts today for nearly 80 percent of total
foreign exchange resources (aid and invest-
ment adding up to only 20 percent), trade will
have to provide the engine for further growth.

4Partners in Development: Report of the Commission

on International Development (New York: Praeger,
1969), p. 14.

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 The obstacles to improved trade perfor-
mance are numerous.The developing countries
themselves have tried for a time to follow
mercantilist policies, keeping imports tightly
restricted, stimulating home production and
subsidizing exports. Their efficiency by world
standards is consequently low, with home-
produced parts and materials more costly
than imports, and investments distorted
toward less efficient sectors. They find them-
selves competing with each other's mercan-
tilist policies, as well as with the aids to
exports provided by some developed countries
for their own trade. Even in agriculture, where
the Green Revolution has raised productivity
and expectations in a number of developing
countries, there are problems. The farm price
support levels for these countries are often
set at twice the world-market level, to stimu-
late production and provide higher rural
incomes. Thus the Philippines has been able
to export rice, but only by means of heavy
subsidies.
Poor-country access to rich-country mar-
kets, where the demand is, and where hard
currencies could be earned, is hampered by
many obstacles. The tariff structures of the
rich countries tend to work against the pro-
duction prospects of developing nations.
Tariffs against raw materials are low, or zero;
but against processed products they are high,
in order to protect processors in the rich
countries. Moreover, the relative competitive
position of most developing nations is weak
because of their own distorted economies,
unrealistic exchange rates, and marketing
inexperience.

The Shadow of UNCTAD

The 1964-69 UNCTAD* confrontation of rich
and poor on this issue eventually resulted in
1968 in an agreement by the developed coun-
tries to grant general tariff preferences for the
manufactures and semi-manufactures of de-
veloping nations. The United States reluc-
*United Nations Conference on Trade and Develop-
ment.

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 tantly ended its opposition to the concept of
general preferences, primarily because this
seemed the only answer to the proliferation
of discriminatory preferences negotiated by
Europe. While agreeing in principle, the
developed nations ran into numerous diffi-
culties in finding a common approach for
implementation. Impasses developed for a
time over two issues: the types of safeguards
to be maintained against excessive or disrup-
tive imports from the beneficiary nations,
and the principle of nondiscrimination itself.
The former problem reflected U.S. desires for
a common system providing equal conditions
of access in all countries. The latter problem
arose over the U.S. policy objective that exist-
ing discriminatory arrangements be ended,
particularly those involving "reverse prefer-
ences" granted by developing countries to
some products of some developed countries.
The United States favored one general sys-
tem applicable to all developing nations
equally, as a one-level departure from Most
Favored Nation tariff rates. Washington es-
sentially lost on both these issues, because
political sentiment for maintaining the special
deals was too strong both in Europe and in
the African beneficiary countries. As for
safeguards, each country agreed to go its
own way.
Now the signatories are preparing to move
ahead with implementation. But the political
outlook for this is not good. The United
States Congress must pass implementing
legislation, and in its present mood may
extract a heavy price in the form of new trade
restrictions. Beyond that hurdle lies one more
fundamental. The Asian countries have been
the most successful exporters of manufactures.
Textiles are their greatest industrial success.
The reaction in Europe, Canada, and the
United States has been to insist on "volun-
tary" import restrictions, penalizing Asians
because of their successes. Using the inter-
national agreement on cotton textiles under
the GATT, the United States has restricted
many countries, and it is now pressing to

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 broaden the product coverage of restrictions
to other forms of textiles.
The problem is not limited to textiles. Any
labor-intensive products which achieve a
high level of export success appear to be
labor-displacing to the recipient countries.
These effects are especially felt, or at least
feared, in low-wage, high-unemployment re-
gions of the developed countries. Pressures
exist continually for new "voluntary" restric-
tions on more and more products. Since the
developing nations have no real bargaining
leverage, and little power to retaliate, they are
easily convinced of the wisdom of voluntary
export restrictions by threats of worse treat-
ment if they fail to cooperate (voluntary
restrictions are always less harmful than legis-
lated quotas, they are told).

Mushrooming Trouble

One small example of the kind of trouble

they face is the story of what happened to
Taiwanese canned mushrooms in 1968. The
Taiwanese had built up in two or three years
an enormously successful export business to
Germany and the United States. Then the
Germans imposed import restrictions. The
U.S. industry had not been hurt, due in part
to very careful marketing by the Taiwanese
to avoid intrusion on existing American sales
channels. The prospect of possible diversion
of extra quantities of canned mushrooms
from Germany to the U.S. was, nonetheless,
too much for the American mushroom in-
dustry to bear. Certain members of Congress
and the Secretary of State were quickly
mobilized to force Taiwan to roll back its
export plans and hold to "voluntary" export
targets. Taiwan protested in vain that a large
number of workers would be affected, and
that these restrictions would make investors
wary of further development efforts in other
export fields. Despite the complaints, export
quotas were quietly established.
Though this is a tiny example, it is not
unique, and it is not limited to the United
States. In Ottawa, Paris, Bonn, the same

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 pressures arise. If broad textile restrictions are
in fact negotiated internationally, we may
expect other labor-intensive products to be
next in line.
The agricultural import restrictions, trop-
ical products taxes, and other nontariff bar-
riers in all of the developed countries add to
the trouble. These forms of protectionism are
in fact far more significant in trade volume
than any possible benefits flowing from tariff
preferences. Moreover, if preferences actually
begin to work, drawing in foreign investment
to produce for preferred access to the markets
of developed countries, other kinds of trade
restrictions could well result. Labor unions
will certainly complain about runaway mills.
Success in any export line will breed restric-
tive reactions. In this psychological context,
the incentive to produce for export is not very
great, and it is not surprising that the govern-
ments of developing countries have trouble
encouraging private investment in the export
business.
While these problems are brewing, foreign
aid has not only stagnated, but actually begun
to fall off. In real terms, the total flow from
developed countries has dropped significantly
in the 1960's.5 The Europeans and Japanese
have picked up a bit, but the United States
aid levels are falling dramatically.
In over-all outlook for the developing coun-
tries, then, the prospects for accelerating
trade and stepping up aid are not at all good.
This will have international political implica-
tions. Until recently, the main export earn-
ings of developing nations have come from
commodities, in agriculture, minerals and
fuels. For products like cocoa and coffee, it is
a handful of landowners who directly feel the
ups and downs of international markets, and
government bureaucrats who get excited
about world market injustice. In minerals, the
big multinational companies dominate.
Exports of manufactures have been gaining

5See the comprehensive analysis of J. N. Bhagwati,

Amount and Sharing of Aid (Washington: Overseas
Development Council, 1970).

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 in recent years. Their growth rate is more
than double that of commodity exports. Thus,
their share is moving up steadily. Some degree
of industrialization is necessary for over-all
development in most of the developing na-
tions, and much of this will turn on export
opportunities for manufactures. Unfortu-
nately, there will be numerous frustrations for
these kinds of exports. They will encounter
restrictive policies abroad, and the economic
losses caused by trade restraints will hit
different kinds of people from those affected
in the past. In manufactures, they will often
hit local business investors and managers;
workers finding regular employment for the
first time in the cities; families dependent on
salaries and not on food raised on small rural
plots, some of which could be stored for
eating in bad times. When these people are
denied the success they have earned, and are
living together in concentrated areas, their
frustration seems bound to generate intense
pressure on their governments and politicians.
These pressures will be even more intense
than the constituent pressures on the local
level we already experience in the rich coun-
tries. The international problem will become
jobs here vs. jobs there, votes for me vs.
votes for him.
The foreign policy stakes must inevitably
rise in this context. What was once a question
of working out a frustrating technical prob-
lem in cocoa prices internationally, among
bureaucrats, now becomes a frustrating polit-
ical problem of satisfying urban workers and
voters that the great industrialized countries
cannot tell them what to do, where to sell,
and how much to earn.

Millions Unemployed

The dimensions of this problem are growing

steadily, because the employment outlook in
the developing nations is extremely bad. The
population problem is inexorably becoming
an unemployment problem. As the labor
force of the poorer countries grows steadily,
new job opportunities fail to keep pace. Even

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 if population growth were slowed dramatically
tomorrow, unemployment would grow for
decades afterward. It is further compounded
by migration from rural areas to cities, so
that it becomes concentrated politically, with
no rural family system to provide basic
"social security." The dimensions of this
problem are not yet fully understood, and
there are a number of urgent studies under
way around the world. According to the
Pearson Report:

Progress must be made in solving the un-

employment problem if social and political
turmoil is not to arrest the development
process. For it is in the volatile cities of the
developing world that agricultural stagna-
tion and industrial unemployment combine
to produce their gravest consequences.
Urban growth is almost universally twice
as rapid as the growth of the population in
general, and some of the largest cities have
even higher rates of expansion. Rural stag-
nation stimulates a flow of migrants from
the land, and urban death rates are often
lower than those in the countryside while
fertility remains high.
It must be asked whether urban trends
can be left to be the by-product of other
forces in society. If present trends con-
tinued, the largest city in India would have
over 35 million inhabitants by the year
2000.6

In such cities, the amount and rate of unem-

ployment will be staggering. Prebisch gave
some idea of the problem in his 1970 report,
concluding that this was now the number one
problem of Latin America. He pointed out
that the proportion of the labor force em-
ployed in manufacturing had actually gone
down, from 35 percent in 1950 to 30 percent
today. To break out of this explosive situa-
tion, mbre industrial job opportunities must
be created. But this requires more exports of
manufactures, either to the developed coun-
tries or to other developing countries, or both.
Although trade with each other offers hope

'Partners in Development: Report of the Commission

on International Development, pp. 60-61.

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 for the developing nations, their attempts to
improve trade among themselves have tended
to run afoul of the extreme mercantilism that
each practices.
Even though the main ingredient to reliev-
ing unemployment must lie in domestic
policies which favor extensive use of labor,
politicians will tend to blame foreign protec-
tionism whenever there are riots of unem-
ployed urban workers. This political aspect
will be accentuated whenever a particular
factory has to lay off workers or slow down
working hours to accommodate export re-
strictions.

While these problems grow, the debt-

service problem will be unfolding relentlessly,
putting ever-tighter constraints on some of
the developing nations as a consequence of
the steady increase in loans to sustain their
development plans. This mix of circumstances
can no longer be dismissed as a series of
technical side-issues.

The Politics of Economics

In other words, economic issues will in-

creasingly be the mainstream issues of foreign
relations in the closing years of this century.
Economic issues involve the internal domestic
interest groups and politics of each country.
Particularly in the developing countries,
where a broadening of popular participation
in economic development is taking place,
economic questions will steadily rise to the
top of political priorities.
One easily senses the major political im-
portance of specific economic issues in the
course of international negotiations. In the
heat of negotiations, those most close to
these specialized problems express freely the
intense political pressures upon them. Coun-
try delegations divide even among them-
selves, with the hardest, most painful nego-
tiations occurring within countries or blocs.
Being specialized, and highly political, the
issues tend to be handled by a small number
of people, with frequent reference to minis-
ters, cabinets, and even heads of state, by-

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 passing the normal bureaucracies in the in-
evitable negotiating crunches.
It is not widely known that even in the
United States, relatively small trade and in-
ternational corporate business issues often
rise all the way to the President for quiet
decision. The reason is not that the inter-
agency committees below him are inadequate,
or filled with stubborn bureaucrats, but rather
that potent domestic and international issues
can only be reconciled by a political decision
at the very top. But despite the fact that such
issues reach the President's desk, they are
rarely conceived and decided in terms of
broad foreign policy. Each problem that
comes along is handled as an isolated issue.
The interconnection of the domestic and
foreign interests of the United States will
become even more pronounced in the next
few years. The prosperity of our farm sector
is increasingly dependent on our world trade
position. The prosperity of our multinational
companies is increasingly dependent on the
interaction of domestic and foreign policies
on trade, investment, taxation and antitrust
laws. American labor has already begun to
reassess its entire view of economic policy, as
I have mentioned earlier, because it recognizes
the direct linkage of its own interests with
international policies and commitments.
In the European countries, private com-
mercial interests have less apparent influence
on their parliaments than U.S. businessmen
exert on our Congress. Nonetheless, whether
in London or Brussels or Rome, domestic
economic blocs are a large factor in politics.
In Europe and Japan, power-usually the
number two position in the cabinet-is con-
centrated in the hands of Ministers of
Economics and Finance, or Chancellors of
the Exchequer. The men who hold these posts
usually aspire to party leadership, and there-
fore treat balance-of-payments problems with
utmost seriousness. Thus economic questions
receive high-level attention, even though
special interests and parliamentary lobbies
are somewhat more muted than in America.

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 The Need for Reappraisal
To cope with the complex and dangerous
problems of this new decade, there is need
first of all to recognize that domestic eco-
nomics have great impact on international
relations, while foreign economic develop-
ments, as never before, are coming to have a
crucial influence on domestic politics. This
is true of all countries, large and small, devel-
oped and developing. Our American decision-
making process treats each economic issue as
essentially isolated from other major ques-
tions, and tries to resolve it on its own merits
or in response to the special domestic pres-
sures it generates. This process should be
replaced with a conscious attempt to consider
integrally the major political and economic
policy questions, and frame guidelines for
dealing with them in continuum, rather than
in vacuum.
A major policy reappraisal should begin
with awareness of the growing power of
mercantilism. As pointed out earlier, the neo-
mercantilism we see today in every country
is at heart an attempt to pass on to other
countries some or all of the economic and
social costs of domestic adjustments. In the
case of the Common Agricultural Policy, for
example, the Europeans have taxed imports,
thus reducing import sales while gaining
revenues. The revenues are used to push
domestic surpluses onto world markets,
further taxing the exports of competitors by
depressing their potential profits elsewhere.
All exporters thus end up paying part of the
cost of Europe's social program for its rural
population. The American textile restriction
program has a similar effect. It penalizes Asian
exporters and American consumers in order
to provide special benefits to Southern mills
in areas of low wages and high availability of
black labor. Neo-mercantilism, sector by
sector, whether aimed at industry relief or
rural poverty, must inevitably repress the
interests of other countries, in particular sec-
tors, in particular regions.
This neo-mercantilism takes other forms as

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 well, such as the continuation of the range
of economic policies which bring persistent
balance-of-payments surpluses to Germany
and Japan. Sometimes other countries, con-
fronted by temporary balance-of-payments
problems, resort to arbitrary trade restriction
measures, bypassing the internationally agreed
rules without a second thought, as have Can-
ada, the United Kingdom, and France in
recent years. Without better international
mechanisms in the future, we can expect
payments crises to lead to more such disrup-
tive, inefficient policies. Resistance to making
really fundamental changes in the inter-
national monetary system, or to developing
effective institutional arrangements for eco-
nomic policy coordination, are symptoms of
this world-wide mercantilistic trend.
Passing along to others the costs of one's
own special problems does, of course, make
home politics easier in the short run. It also
allows the building of intimate ties with
selected countries on the basis of discrimina-
tion against the rest of the world. In the long
run, however, it works to the detriment of all,
rupturing foreign relations, stirring antago-
nisms, misallocating resources, and serving
special rather than general domestic interests.
International initiatives having major eco-
nomic consequences require active domestic
support. The domestic forces in our society
which are outward-looking need to be
mobilized, their objectives pursued in concert.
Where the United States might once have
accepted some damage to its international
economic interests as the price to pay for a
political objective, we must now treat foreign
economic policy as essential to the viability
of any foreign policy at all. This is simply
good politics. For if government is to "march
with American public opinion," it must
respond to the pressures of that opinion,
which generally are expressed through eco-
nomic interest groups. American opinion
today is becoming less abstract, less concerned
with dreams of unity, and more caught up
with the question of how to ensure that we

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 and Europe can cooperate and avoid harming
each other, while Europeans get on with their
internal affairs.
To stress the primacy of economics and
the need for multilateral cooperation in the
years ahead is not to preach economic im-
perialism, or let the profit motive control
social policy. To put it that way is to miss
the real shared benefits to be gained in a
shift away from today's mercantilist trend.

The Asian Future

Consider, for example, the developing

countries of Eastern Asia, now moving ahead
economically at great speed. They are being
caught in increasing dependence on Japan,
their growth spurred by the phenomenal rise
of the Japanese GNP. Growing more than
10 percent annually (discounting inflation)
year after year, Japan already has the world's
third largest GNP, after the United States and
the Soviet Union. The Japanese are intensify-
ing their foreign aid effort in Eastern Asia,
spurred by American pressures. An Asian
Co-Prosperity Sphere is in effect being raised
from the dead, with the unconscious encour-
agement of the United States to help it along.
The United States has poured into East
Asia vast expenditures, in addition to arms
and men, which, diffusing throughout the
economies of the area, has stimulated another
great part of Asian economic growth. Our
military disengagement from the Far East,
now begun, is bound to have economic con-
sequences that increase political stress in the
region.
Our political objective could probably be
best defined as preventing the domination of
Asia by any one power, and doing so by
encouraging new national and regional cen-
ters of political and economic strength able
to keep power in balance. To achieve that
objective, and to ensure reasonable condi-
tions for the economic future of friendly
countries, we should have comprehensive
economic policies ready for implementation
as the U.S. military withdrawal proceeds. The

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 Far East is potentially the strongest economic
growth area of all of the developing world,
and if the United States retains no strong
economic presence there, Japan will be left
alone to dominate the region. That is almost
certainly a prescription for increased political
tension in Southeast and Eastern Asia.
Our present neo-mercantilist policies to-
ward Asia run counter to American foreign
policy objectives. We have military strategies
and policies, but no coherent economic plans.
The other half of President Nixon's Guam
doctrine is missing. This reflects an unaware-
ness of the importance of international
economics. Offending the budding Japanese
giant, and the other free nations of Eastern
Asia, by indelicate handling of trade issues
seems profoundly bad foreign policy. Trade
problems are an essential ingredient in our
over-all Asian political posture, and the more
we disengage militarily, the more we bring
economics to the fore.

Problems Ahead

In Europe, our economic policies have been

relegated to technical level discussions, while
policy-makers concentrate on reviving the
tired NATO defense debates of earlier decades.
Europe is moving ahead toward its own
objectives, convinced that the Americans are
not much concerned about the major shift in
trans-Atlantic economic structure which is
inevitably occurring. No significant effort is
being made to put Atlantic relations on a
course that is relevant to the issues of the
1970's and 1980's. Such a course requires new
and improved institutions, and consultative
frameworks, to regulate policies toward multi-
national companies; toward pollution control;
toward the harmonization of balance-of-
payments trade policies; toward economic
relations with Eastern Europe. These are the
issues which will concern Europe in the next
two or three decades, because Europe is
unifying along economic lines.
More generally, we need to develop inter-
national agreements, codes of conduct, and

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 modes of cooperation, which tackle the neo.
mercantilism problem directly. This means
directly addressing the problem of how to
carry out domestic programs without passing
the costs on to other countries. It means
gradually revising past laws, regulations, and
policies which manipulate the interests of
other countries for the benefit of small
domestic lobbies.
One application of this principle was
embodied in the General Agreement on
Tariffs and Trade. In certain cases, the GATT
provides that when a nation restricts trade
for domestic protection reasons, it must
compensate other countries, or accept retalia-
tion from them. This particular provision
relates to a highly technical set of precedents
and procedures, but its broad legal sense is
an example of one way of dealing with the
problem.
Many types of difficulties cannot be re-
solved so simply as this. With multinational
companies, the problem is to provide some
common set of guidelines for intra-company
pricing, taxation, antitrust, and the sover-
eignty rights of governments. Perhaps the
most complicated problem in economic
cooperation lies in the field of government
regulation of pollution and environmental
adjustment. If each nation goes its own way,
some will be lax and others strict; some will
require costly investment programs, and
others none at all. In the absence of any
framework of agreed procedures, this in itself
will tend to disrupt world trade, investment,
and production. Cooperation in such areas,
where the problems are pressing and growing,
could have a high political payoff.
To grapple with the economics of the
future, some governments may have to re-
structure themselves. This is a particularly
pressing need in the U.S. government, where
international economic issues are handled in
highly compartmentalized fashion. Coordina-
tion and policy guidance are provided by
more than a dozen different interagency
committees (each with subcommittees) and

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 numerous high-ranking officials in many
cabinet departments and agencies and on the
President's personal staff. In this bureaucratic
setting, it becomes nearly impossible to mesh
economics with the other aspects of foreign
affairs.
Not just in Washington, but in the univer-
sities as well, we need analyses and proposals
for new foreign policy departures which rec-
ognize that economic questions will be the
most potent element in the world politics of
the next two or three decades.
More and more political leaders, in the
years ahead, may find themselves asking the
question, "Growth for what?" Governments
may increasingly try to manipulate national
economies toward desirable social ends. If we
travel in this direction, as I think we shall,
the danger of disruptive trade wars and other
neo-mercantilist clashes will loom ever larger.
Our ability to look ahead and begin to
grasp the foreign economic policy issues
which are now upon us will directly affect
American economic interests, and the inter-
ests of every other major country. The con-
sequence of an inactive foreign economic
policy, and a heavy reliance on military-
related discussions and institutions, is to
evade most of the political forces at work in
the world today. Such evasions will ultimately
come home to haunt politicians, for failure
to promote external economic interests will
eventually produce domestic reactions.
Finally, and most important of all in the
long run, are our problems in dealing with
that two-thirds of the world's population liv-
ing in the developing nations. The politics of
the Third World is and will be primarily
economic. The developed nations cannot
block that inevitable trend, which seems
likely to dominate world politics through the
close of this millennium. Relationships with
the poor nations will be a function of the
degree of neo-mercantilism in the rich coun-
tries. There may be wars, heavy pressures,
new dependencies on one or another great
power; but in the end, economics will be the

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 driving force which brings presidents, dicta
tors and ministers up, and brings them down.
Economics, in the years immediately ahead,
will be powerful politics. Neo-mercantilism
will be its scourge, driving nations into inter-
national conflicts, as have ideologies and
military imbalances in the past.
Intense effort to seek, step by step, area by
area, more positive policies, and international
codes of conduct in economic relations, is the
direction we should now travel. Yet the basic
forces at work today, the structures of govern-
ments, the disdain of diplomats and political
theorists for these issues, all seem to portend
worsening problems among the rich, and
heavier repression of the weaker nations. If
trade wars come, they will come hard.

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