annenberg media ♪ annenberg media ♪ japanese cars brought low prices and high gas mileage to american drivers. what happened when political pressure forced import cutbacks? the american steel industry thought their foreign competitors were violating trade laws to make sales in the united states.

how did the u.s. government try to make foreign governments and steel companies play fair? american companies manufacturing abroad and the north american free trade agreement. would americans hear a giant sucking sound of millions of jobs going to mexico? "international trade -- for whose benefit." with the help of economic analyst richard gill, we'll find out on this edition of "economics usa." i'm david schoumacher.

nobody worried too much about the first japanese cars to reach the united states. it w the heyday of the gas guzzler. as the nation's largest consumer of steel, of glass, of rubber, the auto industry drove the economy. and since the days of henry ford, the american auto industry kept its hand on the wheel and its foot on the accelerator. detroit sold the big car. and american drivers bought it. high gas mileage didn't mean much to people used to 30 cent gas. 1973 changed that. war in the middle east and an oil embargo were followed by short supplies,

gas lines, and skyrocketing prices. higher gas prices de datsuns and toyotas look a lot better. to some, importing japanese cars meant exporting american jobs. so why not just cut imports to save jobs? for drivers, cars are transportation. but in detroit, cars are jobs, good jobs, and lots of them. for auto workers, more imports would mean more layoffs, often permanent layoffs, and a search for new work by men and women who had spent their lives on the assembly line. president douglas fraser of the powerful auto workers union took the workers' case to washington. his members and their employers needed protection from their japanese competitors. protecting auto workers and the auto industry made little sense to believers in free trade, like economist robert crandall of the brookings institution, a washington think tank. i rather think that the protection for workers in that industry defeats the purpose.

to the extent that we protect those workers and protect that industry and keep an umbrella over their prices, their profits, and their wage rates, there's no incentive for them to reform. schoumacher: but on capitol hill, worried workers swung more weight than eminent economists. especially with detroit congressman john dingell, chairman of the house committee which sets import rules. almost every country has quotas on importation of japanese automobiles. the french say that they can bring in any number, but only 2% or 3% will leave the dock. the italians allow in 2,300. the british allow in approximately 10%, the germans approximately 10%. the japanese, however, will set up automobile industries around the world in the full expectation that those automobile industries, as well as their own, are going to be exporting into the united states. so i felt it was absolutely necessary in view of the grotesquely unfair trade practices of our trading partners, especially the japanese, that real quotas and domestic content requirements

equal to those of other nations should be laid in place by the united states. schoumacher: john dingell was one of the leaders of a building drumbeat of protectionist feeling in congress and in the press. free traders fought back. in the middle was the nation's chief trade official, special trade representative william brock. you know, they came to us and congress, and they said, "you got to protect us." congress started talking about passing a bill to hold imports to maybe half the present level at that time. we didn't like that because we felt it was the wrong answer. and once you protect something like that, you can't get rid of the protection. so we talked to the japanese, and we said, look, it takes five, six, seven years to re-tool to a completely new market demand. you can't just dream up a new car and put it out for sale. you have to design it, engineering, build new plants for it, build new machines to produce it. and that's a long-term process.

and we suggested that it would be appreciated if they restrained for a limited period of time, three or four years. they did. schoumacher: voluntary or not, the restrictions took hold. japanese auto imports dropped by almost 8% in a year. thousands of auto workers were off unemployment and back on the job. happy ending? sure, if your livelihood depends on the auto industry. but if you're buying instead of making or selling cars, it might be a different story. in the wake of the "voluntary" restraints, a new sticker appeared on japanese cars, the adm, additional dealer markup. generally you are going to pay a little bit more for a japanese car versus an american car. but i think the level of quality that you find in a small car is worth it. oh, it bothers me immensely. i wish they'd get rid of the import quotas. i think it's one of the biggest rip-offs of americans

i've ever heard of. it's only to protect incompetent automobile manufacturers. schoumacher: bad news for buyers was good news for dealers, like toyota dealer kay jennings. for the japanese car business, we sold fewer cars, but we had many, many price increases because of the restrictions. because if you have fewer cars, the prices are going to go up. but it did the same thing to the american cars. we all said -- the only thing that the restrictions, where the restrictions really hurt was the general public. schoumacher: and it wasn't only the buyers of japanese cars who were hurting. we paid more for american cars as well, as american car dealers discovered that they could raise prices, too as long as they stayed under japanese prices. in detroit, employment was high. but at what cost to car buyers? how much did it cost american consumers,

in terms of higher prices of automobiles in order to keep one additional job in and around detroit? and the answer was, by my calculation, somewhere around $160,000. that may sound high to you, but almost every calculation of the effect of trade restraints on employment levels in the united states comes out with something around $100,000 or $200,000 per job. it's not unusual. this kind of fellow looks at the problems that a consumer has in terms of paying a little more for the goods at this particular time. it doesn't look at the future increases that are going to be loaded on once our american automobile industry and other industries are down the tube. nor does he look at the economic consequences of being dependent on goods abroad. he doesn't look at the other costs that are associated with this. and in consequence, he is breeding himself a splendid future and present disaster because he's not looking at the world as it really exists. the competition that comes with trade means choices for society as well as consumers.

the cost of saving thousands of american jobs may be fewer choices and higher prices for millions of american consumers. we asked economic analyst richard gill if the american jobs that were saved were worth the higher prices of cars that followed the restrictions. it's a difficult question to answer because it has so many ramifications. over the long run, exports and imports for a given country tend to balance out, as, indeed, they must for all nations considered together. since imports in a certain sense cost us jobs and since exports in a certain sense create jobs, there is in principle no long-run unemployment problem associated with free trade. hence, economists say let trade be free so that consumers can have lower car prices. that is, they can enjoy the gains from comparative advantage we discussed earlier. however, in the short run,

increases of particular imports -- cars, textiles, whatever -- can definitely cost jobs in those industries. thus, against the gain of having cheaper goods for consumers, you can have painful dislocations in specific domestic industries. also, the long run over which exports and imports are likely to balance may be a very long run. we have been running major deficits with japan for years. good news in terms of getting cheaper goods, bad news in terms of a downward pressure on employment. still, in total, the gains from comparative advantage tend to be so large that economists, unlike perhaps auto workers or textile producers, are willing to wait for the long-term adjustments to work out. of course, if the other country is competing unfairly, then that is another matter. america likes competition, on the football field, in politics, before the law, and in business.

an even match on a level field seems to be the best way to decide the best team, the best candidate, or the best buy. but what happens when a foreign company, a company beyond the reach of american law, doesn't play fair? what happens when free trade isn't fair trade? the american steel industry. modern america -- its buildings, its bridges, its cars -- was built on steel. for almost 75 years, the industrial giants which ran american steel played by their own rules. lack of competition made price increases easy, easier than replacing old and inefficient factories and easier than risking costly strikes over pay raises. but in the '70s, the american steel industry found itself under competitive fire for the first time. and its historic complacencies started coming home to roost.

as u.s. steel waned, euro steel waxed. steel producers from countries like germany and britain undercut american companies on american buildings and bridges. some suspected that german and british steel makers were dumping, selling steel in the united states for less than they were selling it at home, perhaps even less than it cost them to make it. there's no way that this country, which has the only private steel industry in the world, can function with government steel or can compete with government steel dumped over here. so through a whole broad spectrum of devices in the clearest violation of gatt and other agreements and also our laws, subsidy goes on. they bring it over at a subsidized price. schoumacher: but if foreign governments were willing to take loses selling below cost in the united states, why shouldn't we just sit back and enjoy the low prices? another government could pick an industry,

subsidize the dickens out of it, and give it enough money to buy into the u.s. market. and if they gave them enough, they could destroy the u.s. industry, because our industry is just -- you know, one or two or three companies competing with a whole government in some other country, with their whole treasury. well, the practical result of that is to simply dispose of your industry. and ultimately and probably not very far down the line, you will have disposed of your steel, your auto industry. you will have grotesquely hurt all of the industries of which the auto industry is the largest single consumer. that includes computers, textiles, steel, non-ferrous metals, glass, rubber, and a lot of other things. and you'll find that you simply will have de-industrialized that part of your economy. you will find that you will have lost a prodigious number of jobs and you will convert from high-paying jobs to low-paying jobs, not on the basis of fair competition, but on the basis of subsidy.

and all of a sudden, all of those consumers that you've been trying to benefit by seeing to it that they get low prices on subsidized exports that come into the united states, they're not consumers anymore because they can't afford to buy anything. congressman dingell doesn't have enough faith. we have -- one of our greatest resources is our human capital stock. we have an enormously talented, educated workforce. the notion that somehow the only thing that we'll be able to find for them to do is to flip hamburgers at mcdonald's, i think, is outrageous. i don't think that a society is likely to succeed for most of its citizens by trying to lean against the forces of technological and economic change. and it seems to me that's what this debate's about. schoumacher: with industry and jobs on the line, pressure mounted on president jimmy carter. americans deserve protection from predatory pricing practices from abroad, but congressman dingell might lead congress to pass outright quotas, which could wreck the complex and delicate framework of world trade.

as the crisis reached its peak, carter turned to one of the country's experts on international trade and finance, deputy treasury secretary anthony solomon. solomon's solution -- the trigger price mechanism. use the japanese production price as the trigger for starting dumping investigations. everybody in the world accepted the fact that japanese cost production were the lowest in the world. and therefore, if you sold below that, then there was good grounds for suspicion that you were dumping, you were not covering your cost of production, which was the definition under the law. the idea was to meet their legitimate complaint about dumping in a way that would be less disruptive of imports that would be of some help to the steel industry, and at the same time maintain price competition, particularly in the zones above that of

covering the cost of production of the most efficient producer in the world. i must tell you that a lot of economists have told me it was a very elegant concept. schoumacher: elegant it may have been. but did it work? the trigger price mechanism was an effort to sort of soft land the u.s. steel industry, to not totally protect, but to give them some assurance that they weren't going to be undercut in prices and could continue to grow and to invest. i'm rather pleased by, frankly, my ingenuity in coming up with it. it still preserved the basic comparative cost of advantage theory, which underlies international trade. it, uh, solved, for a couple of years, the political problem and avoided protectionist quota action. um, and, uh, all the key actors --

both the domestic industry and labor on the one hand, the foreign exporters to our market on the other -- all felt that it was a much better solution than what was happening without it. schoumacher: the international steel trade speeded up in the wake of the trigger price mechanism. whe the tpms slowedown subsidized competition from germany and britain, japan's high-efficiency steel industry and low-labor cost steel producers from korea, argentina, and brazil got into the game. the trigger price mechanism was an effort to draw a line in the battle between fair and unfair trade practices. but the war is much wider. it's not confined to the steel industry or to dumping or to any one or two countries. after the trigger price mechanism expired, there was a strong drift toward protectionism in many countries, including the united states. we asked richard gill to comment.

there is little question that in the mid-1980s protectionist sentiment was in the air. a suspicion arose in the united states that some foreign countries were using exports to the united states as a means of promoting the domestic growth of their own economies. they were flooding us with their goods while keeping ours out. if this suspicion were based on the existence of very high tariffs abroad, it would be fairly easy to evaluate. unfortunately, most of the obstacles that countries place in the way of foreign imports are more subtle than that, what economists call "non-tariff barriers" to trade. government subsidies, as in the case of steel, are sometimes overt, sometimes hidden and complex. complicated licensing and import procedures, special regulations concerning the standards, specifications, and testing that imported products have to meet. the magnitude of such barriers is very difficult to assess.

what can be said with some confidence is that countries who are running huge trade surpluses with the united states, like japan, should take quite seriously the effort to open their economies to american goods as much as they can. for the alternative is very likely to be increased protectionism in the united states, higher tariffs, more quotas, special restrictions of our own. and in this case, although we may suffer, perhaps even more seriously. suffer, o, the correct path is as obvious as it seems difficult to follow. not too many years ago, the words, "made in japan" were synonymous with low price and even lower quality, while imports such as french perfumes and fashions werenly for the wealthy. while imports such as frwell, not anymore.fashions many of the people shopping here today came in japanese cars riding on french tires. anwhile most of the products sold here

are stilmade in america, they comte for consumers' dollars with products made in the far east, central and south america, and europe. the united states is still the world's biggest economy. what good does it do us torade with other countries? many mexicans, unable to nd good bs in their own coury, were looking for work across the border, in t united states. how to stem the flow of the objob-seeking mexicans. what was keeng investment and jobs out of xico? was there a way for mexico to attrace goodobs what wthat would encourage and mexican woersico? to look r work in mexico. mexico's resume as a host to employers looked ideal. it had ready supplies of energy, access to the ge consumer maets of the united states, and most important of l, large labor force.

but for years, much of mexico's labor force the resultf policies that excluded job-creating foreign investment, policies followed by the governments of botxico d e unedtates. was there a solution, one that would attract investment to mexico and induce mexican workers to look for work at home? e maquiladora was one solution. border factories in which mexican workers assembled u.s.-made componenfos to the american market. what did the maquiladora offer to the two sides oforder? it's a twofold process which involves both mexico opening its border originally only on an experimental basis, and creating a fe trade zone which would be an incentive from the point of view of american companies,ico.

the intest was to be able to find more hospitable conditions ofroo including lower wages and also fewer impositions from theointf ew of environmental protection, safety in workplaces, and other, what they saw as bureaucratic impediments for production. schoumacher: the maquiladoras started small, a few low-skill assembly operatio. but by 1993, 2,000 maquiladoras were doing almost $6 billion worth of business, employing over half a million workers, woers who didn't need to cross the border to get a job.a pr had attracted investment and jobs to the border area. could oand better jobsider into the heartland of mexico? policies begun under presidents salinas

and de le madrid in the 1980s made mexico more attractive to investment from abroad. foigowrsp restctions were reduced. governms e result -- a freshet of foreignnvestment. companies like u.s.-based cummins engine, whose engine plant in san luis potosi north of mexico city combined technology and training to producene of the company'sm. we've built up a cadre of very experienced and expert peopl anthat's ourosimrtant asse-- our people are our most important asset. to achieng tolerances onous our crankshaft machining line

wiithat's not bends and weld technology. schoumacr: mexico's new policy of openness to foreign investment had taken mexico from the simple assembly work at theomaquiladorasment to the full production and high technology at cummins. what did trend signify for the mexican economy? the maquiladora program then stands as e blueprint and e purpose iso makeof these y anivmexico more attractive for reign investment. schoumacher: manyexican workers still cross the u.s. border for reign investment. schoumacher: in search of better jobs. but the low-tech jobs at border maquiladoras werevidence that lowered at cumt barriers and less regulation could atact billions in investment and allow

hunddsthousas oforke to find jo without leaving home. evidence that paved the way for the gradual integration of mexico into the continent-widerthy evidence that paved the way created in 1993 by the north american free trade agreement. the winners in the maquiladora program were u.s. corporations which gained access to cheap labor, mexican workers who now found better job opportunities in their own country, and u.s. consumers who could buy low-price products proded by amican-own mailadora coies. thbiggest losers w low-skled workers who now found fewer job prospects. but ev if thora prograhad nobeen ced, those bs probably we lost anyway, with the business going to foreign-owned businesses elsewhere. we asked economic analyst nariman behravesh for his though on the maquiladora program and free trade between the u.s. a mexico.

when a multinationalompanyfroy the imct is very similar nterna. choossuchs mexico, inevelopy oduconoveso e couny with a comrati advantage inrocing thoseoods. as in the case of trade, these benefits both the country making the investment and the country receiving as inthe investment.ade, while there are some job losses, typically low-skilled workers in the country making the investment there are more winners thansses, tylosers in bothountries.kers thus, investment, like trade, is a positive-sugame rath than zero-sum game. in the e turned out to be so successful that it was a major factor behind the establishment of the north american free trade agreement, or nafta. the combination of the maquiladora program and nafta has helped mexico to enjoy rapid growth during the last half decade,

but not at the expense of u.s. jobs growth. many analysts now talk about mexico as the next tiger economy, or leopard economy, because there are no tigers in mexico. economic principle tells us that free trade or at least freetrade will mean lower consumer prices anin the long-term, job security and a stable, competitive economy. but in the real world, the short-term world, all of us and our elected officials find it hard to turn awayfre whose bs a threatened bycompe, no matter how fair that competion. for "economics usa" this is david schoumacher.

no matter how fair tannenberg media ♪ annenberg media ♪ gold was thetandard agait which most of the world vaedtsurncy. in 1944, world leaders the godesigned a blueprint