The trade war latest
Nicholas Davenport
A friend took me up on my remark that history only repeats itself when its lessons have not been learned. I gave the intelligent Group of Ten central bankers as an example, for they have certainly learned their monetary lessons and will do their utmost to repair the breakdown in the world's monetary system. They know full well that the great depression of the 'thirties grew out of the collapse of the old gold standard and the growth of protectionist and deflationist national regions. My friend pointed out rightly enough that intelligent bankers do not now control national destinies — when they did they were not intelligent enough and made a hash of it — but clever-monkey politicians who have not learned any lessons at all except those of power politics. We are now up against clevermonkey politicians like Mr Richard Nixon and his Secretary of the Treasury, Mr John Connally, just as we British had to endure five years of clever-monkey Mr Wilson. What Mr Nixon and Mr Connally are now saying to the world is that they do not care about the lessons of the 'thirties. All they know is that America was then down and out and they are not going to let that happen again because they want Mr Nixon to win the presidential election of 1972. If anyone is going to be down and out it is not the United States but the rest of the world. They have had the world on their backs too long. They rescued Europe with Marshall Aid. They have protected Europe since the second world war with their nuclear shield. They have busted the dollar by fighting communism in SouthEast Asia. They are now going to look after themselves which they can well do because they are virtually a self-contained economy. They are determined to make America prosperous by 1972.
These were the sentiments which were expressed at the recent annual convention of the American Bankers Association in San Francisco. When Mr John Connally, flanked, it is said, by two huge American flags, got up to explain Mr Nixon's new economic policies he was given a standing ovation. He accused the world outside of hypocrisy in objecting to the American 10 per cent surcharge on imports. Britain behaved worse in 1964 when Mr Wilson clamped on a 15 per cent surcharge on imports, breaking not only the rules of GATT but ratting on her EFTA partners. But he omitted to mention that Mr Wilson was then foolishly trying to defend the old sterling parity of $2.80. In the present case Mr Nixon has not only imposed a 10 per cent surcharge on imports but has broken away from gold convertibility and forced the trading nations to float upwards against the dollar. The upvaluations which have so far occurred against the dollar are close on 9 per cent for the German mark and the Japanese yen, 8i per cent for the Swiss franc, over 8 per cent for the Dutch guilder, 7 per cent for the Canadian dollar, 6 per cent for the Belgian franc, about 4 per cent for sterling and 3 per cent for the Italian lira. So where the 10 per cent import charge applies countries trading with America find their goods up-valued from about 14 per cent for Britain up to 19 per cent for Japan and Germany and 18i per cent for Holland. Canada feels particularly hurt because being a neighbour and doing most of her trade across the invisible border she has failed to obtain any concession whatsoever.
Not content with dealing a terriffic price blow through its 10 per cent surcharge Congress has passed a most objectionable protectionist Act in the case of capital goods. It has withdrawn the tax credit for machinery and equipment produced abroad. For American-produced capital goods the tax credit is now to be 7 per cent throughout. In conjunction with the 10 per cent import surcharge this will create a virtually prohibitive new trade barrier which will continue even after the 10 per cent import surcharge is withdrawn. As America is our third largest export market it could have serious consequences for our machine tool industry whose net new orders were already down by 34 per cent in the first half of 1971. It will be far worse for the German exporter of capital goods who will now have an effective price barrier of close on 27 per cent. Mr Connally calls this protectionalism "a job development tax credit" and was loudly cheered for it at the San Francisco convention. It is almost as nasty as the Bill now before Congress prohibiting the award of contracts to foreign firms who pay lower wages than the US.
It is small wonder that when Mr Connally talks of improving the American balance of payments by $13,000 million — even if he means only about $10,000 million — a number of countries are going to be hard hit. Canada, Japan and Germany will be the worst sufferers. Canada, which does 70 per cent of her export trade with the United States, already has the highest rate of unemployment of any western industrial economy. In the case of West Germany only 10 per cent of her exports goes to the United States but if Mr Nixon decides to withdraw troops from West Germany there would be a recession. Already five of the leading German economists are forecasting a slowing down of the economy and a rise in unemployment. In the case of Japan about 30 per cent of her exports goes to the United States and most of them will be subject to the surcharge. If Japan is frozen out of her American markets she will make a determined effort to jump over the EEC tariff wall. Mr Campbell Adamson, the director-general of our CBI, has issued a warning about the penetration of European markets by the Japanese.
One good thing might come out of this trade war. The European common agricultural policy might collapse. As a large grain exporter the United States is strongly opposed to the rise in grain support prices in the EEC. Indeed, American farmers see their declining exports to Europe coming to a stop while the European surpluses cut into their markets in other parts of the world. It is not impossible that a modification of the EEC common agricultural policy may become a condition for the removal of the American 10 per cent surcharge. Strong feelings are aroused on this prickly subject and American officials are said to be drawing up a list of demands for EEC concessions. The gold price comes into this quarrel because the EEC farm prices are expressed in units of account' which have same notional ratio to gold as the US dollar. When it comes to 'horse trading' no one is better equipped than a tough Texan like Mr John Connally. The Americans are determined to get their economic growth rate up to 6 per cent and the inflation rate down to below 4 per cent before the end of 1972. They have a long way to go to reach these targets. The trade war is therefore likely to be prolonged. So do not expect the City to be anything but fearful and the City to be anything but nervous while the trade war lasts.
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