Originally published February 9, 1987
WHEN THE Republicans lost control of the Senate, Wall Street was loud in its prophecies of doom and gloom to follow from Democratic attempts to protect American industry and agriculture. Wall Street was an appropriate locale for the wailing, because the issue is not free trade versus protectionism, it is finance against industry (and everyone else).
Not that there aren’t plenty of doctrinaire free-traders around. They recognize that American steel can’t compete with foreign steel, that American textiles can’t compete, and that American agriculture can no longer compete. They even understand that we can’t compete because foreign standards of living are so much lower than ours. But they put their trust in the infallibility of the market, accept our industrial decline as inevitable, and reflect in comfort that the cost of living is thereby held down for the rest of us. (Take away industry and agriculture, and the rest of us soon won’t have much to do.)
Purists think we should abandon our steel industry and rely on imports from Brazil, Korea or wherever. There are those – I have met and talked with some of them – who are ready to let steel go and are simultaneously eager to devote upwards of 10 per cent of our gross domestic product to defense, since they contemplate the possibility of war, perhaps only with Nicaragua, perhaps also with Cuba and even with the Soviet Union. These knee-jerk free-traders are above wondering how, in such a war, we could get Brazilian steel safely through hostile waters or protect Korean mills from bombing. I mention them only because they personify the pure free trade doctrine. Anyone who retreats from that doctrine in the interest of national defense must logically be willing at least to consider the possibility that other retreats would also be reasonable – in order, say, to defend American industry and agriculture.
To see how finance and industry are opposed, let’s first look at the steel industry. Everyone knows it is in trouble. LTV, which was allowed to merge with Republic Steel on the theory that big is beautiful, is in Chapter 11. United States Steel, which only yesterday was the archetype of modern industry, has now beenthrust below the salt by its conglomerate progeny, going by the arrogantly punk name of USX. Bethlehem and the rest, with the exception of some smaller specialty companies, are closing plants apace. All this has happened in the midst of the greatest military expansion in history, a tremendous boom in steel-girdered office buildings and apartments, and record automobile sales.
And steelmakers have a solution to their problem: restrict or prevent foreign imports.
What has that got to do with finance? Well, banks are in trouble, too. BankAmerica has recently had a shake-up and has had to fight hard to avoid being taken over. A larger number of banks have gone bankrupt in the years of Reagan prosperity than in any comparable period since the Great Depression. More to our present point, many, if not the majority, of our major banks are exposed to nonperforming foreign loans greater than their total assets. Most of these loans went to finance factories and farms competing with ours, quite effectively. The trouble is, there are too many of them.
And the banks have a solution to their problem: import more from the countries that have borrowed their money our money.
Obviously we can’t both import more and import less at the same time. Yet if we don’t import more from the Third World (not to mention the Communist World) the banks won’t get our money back. On the other hand, if we do import more, our industries-including our basic industries-will be destroyed, and our fellow citizens – including those with know-how essential for national survival – will wind up in soup kitchens. If they’re lucky, they’ll get jobs ladling out the soup.
So we face a first-class dilemma. Secretary of the Treasury James A. Baker thinks he has the best solution. He’s got Europe and Japan and Canada to agree (more or less) to get as “prosperous” as we are. They’re not actually going to do much about it for almost a year; but after that Baker expects them to buy steel and computer chips and wheat from us instead of from the Third World (or from themselves). Then he expects them to buy lots of raw materials from Third World countries, which would thus be able to pay off what they owe our banks. Our exports would soar, we’d payoff our debts (the greatest in the world), and everybody would be happy.
There are added bonuses in Baker’s scheme. For Europe, Japan and Canada to get as prosperous as we are, they’d have to lower their interest rates (already lower than the U.S.’). That would allow the lowering of ours, making it easier for those of us who want to borrow. It would also make it easier for our prime borrower, the Treasury, to lower the rates it pays and still attract European and Japanese and Arabian buyers for the bonds and notes it issues. The lower interest rate would reduce the drag of the deficit, and the foreign buyers would continue to help finance it.
You can see why the press thinks Baker is the smartest Secretary of the Treasury we’ve had in a while. It’s not simply that the act he has followed doesn’t rate as a tough one to beat.
Our friendly allies, however, didn’t get where they are without having some smarts of their own. Their smarts are exactly like ours, and have got them into exactly the same sort of mess. Their industries and agriculture are being ravaged by Third World competition, and their banks have their share of nonperforming Third World and Communist World loans. Their dilemma is exactly like ours; and if they follow Baker and solve our problem, they’ll only make theirs worse. This has not excited their enthusiasm.
There is another aspect of Baker’s scheme that I haven’t mentioned. He wants Europe and Japan to lift whatever restrictions they have on the operations of American financial institutions – banks, insurance companies, brokers, and so on. He has his eye on the “invisible imports” that underwrote the British Empire in the 19th century. He seems not to have noticed (a) what has happened to the British Empire in the 20th century, and (b) what has happened since our banks triumphantly recycled OPEC’S 1970s winnings into non-performing Third World loans.
WAlT, as the TV commercials say, there’s more! International banking has already largely escaped from national regulation; that’s why the banks want to beef up this part of their business. Being a principal performer in the most doctrinaire of administrations, Baker is not likely to be alarmed at the prospect of unregulated banks and brokers roaming the world. But it does not take much imagination to foresee that as the overseas branches of American banks compete to press Eurodollars on reluctant borrowers, they will sooner or later find themselves with fat portfolios of nonperforming loans. They will then run to their American parents to help them with real American dollars, whereupon their parents will threaten to go bankrupt and go running to Uncle Sam, who no doubt will bail them out.
And there’s still more! There is more to finance than financial institutions. Take General Motors – and I’m not even going to talk about General Motors Acceptance Corporation. Two days after last November’s election (I wonder why they waited until then?) GM announced the closing of 11 plants employing more than 29,000 people. This will happen over three years and is said to be due to foreign competition. But it is due to finance.
Before the closings, GM had 223 plants in 22 countries employing 762,500 people. In the report I’m using, the United States and Canada are lumped together; even so, there are, in the rest of the world, 74 plants employing 162,500 people. Now I ask you, what do GM’s foreign plants do for American industry?
Practically nothing is the correct answer. They may import some American parts or assemblies, and they no doubt rebuild a few Cadillacs to meet the esoteric needs of Arabian sheiks. But it’s a good bet that GM imports far more from its foreign plants than it exports to them, and you’ll note that none of the foreign plants is among the 11to be closed, and none of the foreign employees is among the 29,000 due to be dropped.
GM’s foreign operations take American jobs as surely as does Suzuki of Japan. From the point of view of the United States, it is doubtful that the foreign plants have yielded even invisible income, because their earnings have almost certainly been reinvested abroad and thus have escaped U.S. taxes.
I mentioned Suzuki, of course, because GM owns a piece of it, just as it owns 38.6 per cent of Isuzu Motors (did you wonder how Isuzu was able, almost over night, to find dealers for its trucks all over the United States?). It also owns 50 per cent of Daewoo Motor Ltd. of Korea. These are not industrial operations but financial operations. GM will make money by helping foreign companies compete with American industry. Invisible imports cost visible jobs.
In the modern world, free trade is a smokescreen for the benefit of finance. The Democrats should not allow themselves to be blinded by it. Secretary Baker and his boss have their priorities backward. They can’t do much about the prosperity, or lack thereof, of Europe and Japan, but they could do a great deal about the 30 or 40 million of our fellow citizens who live in poverty. Prosperity begins at home.
The New Leader