On the train into Manhattan yesterday morning, I read The New York Times account of the Clinton administration’s trade sanctions against Japan: 100% tariffs against Toyota, Nissan, Honda and Mitsubishi luxury autos -- punishment for Japan’s refusal to require those companies to buy more U.S. auto parts. As I read, I thought of Pearl Harbor and the war and Hiroshima and Nagasaki and V-J Day -- the anniversary of which we will be celebrating soon. By coincidence, I had arranged to have breakfast just this day at the Waldorf with a Tokyo client, a bright young banker who is visiting this week to ponder the U.S. bond market. My life has been filled with such coincidences, this one giving me an opportunity to ask a question that occurred during the train ride. In all the 25 years I have been observing our government lecture and bully Japan about correct trade practices, this is the first time I’ve felt the ordinary people of Japan would show open rebellion. In earlier episodes, the Japanese government has actually asked the citizenry to make a special effort to buy American goods in order to please us. This time I think we’ve crossed a line of propriety. I asked the visitor if he thought the event would cause the people of Japan to buy more or less American goods. He looked down solemnly at his scrambled eggs and said quietly, “less.”
On the way in, I’d reflected on Henry Ford’s support of the Smoot-Hawley Tariff Act of 1930, and informed my client of that fact. Ford obviously did not care that it raised duties on canned olive oil from Italy along with imported cars. The U.S. did not produce any olive oil, but one Maryland importer of bulk oil who wanted to shut off the canned imports persuaded Senator Goldsborough to add the provision into the act that President Hoover signed. As economic historian Isaac Asher later wrote: “The Italian reaction took the form of indignant editorials charging that the United States was attempting to corner the gold supply and ruin the entire world, especially Italy. The campaign against American automobiles was especially bitter. Italian drivers were embarrassed and annoyed at having their tires punctured, their windows spat upon or broken, and further harassed by the Royal Automobile Club of Italy which wanted to publicize the names of all Italians buying American automobiles and to demand an official statement of reasons for their choice. The importation of new cars was stopped by unheard-of duties. For example, a duty of $815.50 was imposed on each Ford car; $950 on a Plymouth; $1,385 on a Chrysler 77; and $1,660 on each Chrysler Imperial. American agencies closed up by November 1930, and Ford closed his assembly plant.” The rates, then as now, are at 100% ad valorem.
Smoot-Hawley also sharply raised the tariff on Japanese silk, at the request of American textile manufacturers who did not like to lose customers for their cottons. Inasmuch as every family farm in Japan was kept solvent by producing a bit of silk for export, the tariff put the farm sector into immediate depression. It is child’s play to then trace the economic contraction to Japanese militarism, its aggression in Asia, and ultimately Pearl Harbor. It is also no trouble to trace Smoot-Hawley’s impact on the German political economy and the rise of fascism, although I did not think much of Germany on my train ride yesterday. The Clinton administration has not yet picked a trade fight with the Germans.
I advised my Tokyo visitor that there is still plenty of time to avoid a political crisis between our two countries. I explained that our sanctions really had little to do with Japanese auto parts, but were rather a product of presidential politics in our country. President Clinton had made his supporters in organized labor unhappy these last two years, in his support of the North American Free Trade Agreement and the Uruguay round of GATT. He picked a fight with Japan to show how tough he can be, which means he will back down if public opinion doesn’t support him on this. In the same way, I explained the Republican leaders in Congress are all being driven by presidential politics. Senator Dole and Senator Gramm have their eyes on the Ross Perot voters, who are presumed to be protectionist because of their opposition to NAFTA and the World Trade Organization. I explained that the Republicans are not smart enough to understand that the Perot voters took these positions not because they are protectionist, but because they see these moves as being identified with Big Business and its never-ending search for cheap labor -- arguments that are not without merit. Indeed, Mexico’s peso devaluation vindicated Perot’s position. In the case of Japan, I would be surprised if either Perot or his supporters were smiling upon the transparent greed and invidiousness of Ford, Chrysler and General Motors. Perot is hardly a fan of GM’s blunderings anyway. Considering my role in helping Chrysler get its government bailout in 1979, I felt a twinge of shame for the company. It could never have climbed back where it is without the help of Mitsubishi, as a supplier of engines in Chrysler’s darkest days.
Why am I optimistic then? I advised my breakfast companion that the United States has actually learned a thing or two during the last 65 years, that we have matured far beyond where we were in 1930, although we still have room for improvement. We are now the world’s only superpower because we have the most efficient democratic system, I said, which permits the most serious airing of views and public debate before we plunge into the kinds of grave mistakes that might cause great wars. I showed him the front page of The New York Times, the voice of the liberal Democratic Establishment, and suggested he read the analytical piece by Peter Passell, “Trading War: No Way Out?” The piece, obviously sympathetic to the Japanese cause, quotes prominent economists, including one at the top from William Cline of the Institute for International Economics: “I think the Japanese have had it with threats from America. I think they won’t budge.” I said that as long as Tokyo remains calm, patiently making its argument that it cannot force its citizens to buy American goods as our government demands, the American people will gradually learn what this is all about and public opinion will force the White House to back down. (In an important editorial in this morning’s Times, “The $100,000 Lexus,” the newspaper flatly observes that the Clinton decision “seems designed more to mend the President’s relations with American unions than to resolve trade differences with Japan.” And, “It is hard to imagine the American Government telling General Motors and other American auto manufacturers they cannot produce many of their own parts.”)
There is one problem, I explained. At the time of Smoot-Hawley, the American political establishment was uniformly in favor of the tariff act. There were no leading Democratic voices raised against it and of course the GOP and Herbert Hoover had instigated it at the behest of Big Business. It was not until the Democratic convention in Chicago in 1932 that we learned Franklin Roosevelt, the nominee, would accept a free-trade plank. It was from that point that the Dow Jones Industrial Average began its climb from the bottom, 41. (Yes, forty one.) The GOP remained stubbornly isolationist and protectionist until 1940, when Wendell Wilkie, a Hoosier businessman who had never run for office but preached grass-roots capitalism as well as international cooperation, was persuaded to switch parties and run for the GOP presidential nomination. He won in a contest with Sen. Robert Taft of Ohio, Sen. Arthur Vandenberg of Michigan, District Attorney Thomas E. Dewey of New York City, and Herbert Hoover, who was attempting a comeback. Wilkie got 22 million votes, more than any other Republican in history, but lost to Roosevelt and the don’t-change-horses-in-midstream argument, when the Nazis marched into Paris.
There is now no such person in the presidential campaign, I said, but it could be that Malcolm Forbes, Jr., the publisher, will enter the race, with roughly the same simple themes espoused by Wilkie. The difference would be that the United States in 1940 was going into a war and now has come out of one. My guest was cheered to learn that Forbes had publicly condemned the trade sanctions against Japan, and that if he enters the race, his position will influence the outcome of the dispute. “The name Forbes is very well known in Japan,” he said.