Beware protective instincts

TRADE wars are the most imminent threat facing a new US administration. With the latest breakdown of the Uruguay round of Gatt talks, the unfinished business of the North American Free Trade (Nafta) negotiations, and renewed US-Japan tensions, there are no frameworks in place to contain smouldering trade fires. But almost immediately after the new Congress is convened in January and the next president is inaugurated, a new administration will have to take some hard decisions that will shape the international economic landscape for decades.

Alas, as the unravelling of the Gatt talks painfully illustrates, the outcome is unpredictable. From the US standpoint, much will depend on the composition of the new Congress, where Democrats are expected to make important gains in the US Senate, and as many as 130 House seats could turn over. In addition, the administration's new economic team, whether it be led by George Bush or Bill Clinton, is not known.

What is known is the alarming growth of 'the protectionist impulse' among US voters, as gauged by numerous opinion polls and reported in the work of Daniel Okimoto and James Raphael of Stanford University. Although their work centres on the US-Japan relationship, the generic findings can be broadened to include Europe and other trading nations.

Mr Okimoto and Mr Raphael have discovered that Americans have ambivalent feelings towards Japan as a trusted ally and trading partner. Meanwhile, the work of these and other researchers demonstrates that, almost across the board, the US public supports protectionist measures when confronted with the prospect of lost jobs or threatened US industries. This has showed up in polls conducted in the Seventies, the Eighties (when the US trade deficit surged) and even more strongly in the Nineties. For example, a national poll conducted last year for the Detroit Free Press found that 59 per cent of the respondents favoured more restrictions on Japanese imports, even if this resulted in sharply higher prices.

The public's deep-seated preference for protectionism as a short-term solution, even when it realises the longer-term risk to economic health, places a heavy burden on government. Foreign trade is not seen as a burning national issue, but declining US economic power and lost jobs are. Therefore, after achieving a high profile in the election campaign, the policy makers have an opportunity to move public opinion in the right or wrong direction. The damage a demagogue could do in this unsettling period of economic stagnation cannot be overstated.

This is particularly true in the context of US-Japan relations. With Japan's trade surplus again surging to record levels, dormant US resentment is reawakening, most notably at the grassroots level, where the image of Japan as an economic predator is now firmly entrenched. Indeed, the work of Okimoto and Raphael suggests that the relationship has reached a critical point. It will either be managed successfully with new rules or become confrontational, depending on whether the 'revisionists' make their voices heard in the new administration.

According to Okimoto and Raphael, in US history no country has 'excited more outrage and sheer hatred' than Japan during the Second World War. But from perfidious foe, it came to be seen as a staunch US ally during the post-war American occupation and subsequent Cold War period. This special relationship, in which Japan became America's anchor in the east, came to the fore again in the Eighties. Then public opinion swung sharply, largely in response to the view of the revisionists that Japan posed a serious threat to US interests and to the existence of free trade rules administered by Gatt.

By 1991, according to Okimoto and Raphael, most Americans believed that Japan posed a greater danger to US security than the Soviet Union. Much of this was due to a wave of direct investments, including the purchase of such national crown jewels as Rockefeller Centre, Columbia Pictures and the Seattle Mariners baseball franchise.

The revisionists claimed that Japan was different from the West, exclusionary and very predatory as a result of a business-government partnership designed to win new markets abroad. The theory took firm hold, in part because of the end of the Cold War and the lack of new structures to govern the relationship in a new world order.

Now the challenge is to foster a healthy relationship, and not to pander to the protectionist instincts that also lurk in Congress. This means that the new administration must articulate a trade policy quickly and appoint good people to administer it. The challenge applies not only to the two unfinished trade agreements and the US-Japan relationship, but to Europe. The long and tedious confrontations over agriculture have also given Europe, and particularly France, a bad image in the US.