Toward freer trade: what the US sees as next step

US deputy trade representative Michael B. Smith has what he calls the treadmill theory of trade. It holds that unless the world walks forward toward greater trade liberalism, it will slip backward into worse protectionism. In 1979, some 80 nations completed what Mr. Smith terms "the most significant trade negotiations in scope in the history of the world" -- the so-called "Tokyo round."

Now, the United States has plans for its next steps forward. These, he noted , include the following:

* It wants to limit the export credit subsidies given by many industrial nations for such major items as aircraft, "turn-key" factories, and nuclear reactors.

"We are finding ourselves in a curious position," he said during an interview here, where he represents the US at the General Agreement on Tariffs and Trade (GATT) headquarters."The industrial countries are competing not on the basis of price or quality, but on the size of their interest rate concessions on exports."

"These have got to be brought into rein," he went on. "Otherwise there is going to be a trade credit war."

Under a gentleman's agreement worked out through the Organization of Economic Cooperation and Development in Paris, the industrial nations are not supposed to offer credit at an interest rate lower than 7 or 7.5 percent per year, he noted. But this rate floor is sometimes violated and is far too low, considering market rates of 14 percent or better.

"The market rates has to come up toward the market trade," he said.

The worst offender, he contends, is France.

* A code of conduct should be negotiated by GATT to govern trade in services, such as insurance, banking services, engineering services, freight forwarding, and so on. For industrial nations, 40 to 50 percent of trade already consists of services, Mr. Smith noted. "It is where the future of trade is." Some 41 percent of US exports, for instance, are in services.

So far, the barriers to trade in services are not major, he said. But there is "a danger of proliferation" of such barriers.

* Also needed are limits on the amount of financial or other inducements that a nation can offer foreign investors.

"We think these are outrageous," Mr. Smith said. "It is a problem the world must come to grips with."

* A new "multifiber arrangement" (MFA) must be negotiated that will allow exports in textiles to continue growing.

Free-trade enthusiasts here find this current four-year agreement, which expires at the end of the year, embarrassing.It limits the textile exports of developing countries to the rich markets of the industrial nations to a growth rate of 6 percent, with "reasonable departures," a loophole demanded by the European Community.

Without the fiber pact, Mr. Smith maintains, there would be chaos in the textile industry as the poor nations competed with one another. Indeed, he holds that the agreement also serves the interests of the developing countries.

"Very few voices from the exporting world are calling for the abolition of the MFA," he said. "The alternatives are too horrible to contemplate."

Without it, he says, such nations as Hong Kong, Taiwan, and Singapore would have "eaten up the market," leaving no room for poorer countries like Bangladesh and Sri Lanka. The latter are able to benefit from quotas allotting them portions of the industrial nations' markets.

Further, some industrial nations would have taken "draconian measures" to protect their domestic textile industries. Mr. Smith pointed out that 2.3 million workers in the US work in the textile and apparel industries. "No administration is going to see that industry go down the tubes," he said. "There are too many sociological and political problems, as well as economic issues, involved."

Mr. Smith maintains that the US has been a good market for textiles for a number of countries, despite the "moans and groans" from the exporting countries. For instance, some 500 million foreign-made shirts were imported last year.

Negotiations for renewal of the MFA resume July 13, but are not expected to be concluded until late autumn. The new French government, it is thought, will take some time to get its position together.

During the Tokyo-round negotiations, Mr. Smith acquired the reputation for being a tough negotiator. Now he is responsible at GATT headquarters for the follow-up on that round regarding its nine codes and other features.

For example, the United States is now in a dispute with India over what the US regards as subsidies by India on some exports. The US imposed countervailing duty without asking the International Trade Commission in Washington whether the domestic industry had been injured. India maintained that the US should have found whether there was "material injury" before acting, and complained to GATT. The issue: manhole covers.

The US wants to see such developing countries as India, with a substantial industrial sector of its economy, "graduate" to signing a code controlling export subsidies.

Despite such trade hassles and probably more in the future, Mr. Smith sees growing trade as one of the best means for economic progress in the world. "Thus far we haven't got a better system than to spread the goods around by increasing the flow of international trade. The best way we can meet the needs of all mankind is the free exchange of goods."

When the reverse is attempted, he adds, history shows that when barriers to trade are widely erected it can produce political problems that can lead to war.

This attitude fits well with the Reagan administration goal of spreading to the world marketplace its free-enterprise ethic, urging foreign nations to trim government restrictions and trade distortions.

Second of two articles on the international trade scene.