The Heritage Foundation

Executive Memorandum #14 on Trade, Economic Freedom

February 18, 1983

February 18, 1983 | Executive Memorandum on Trade, Economic Freedom

Beware, Mr, President, of Backdoor Protectionism

(Archived document, may contain errors)

2/18/83 14


A petition-from Houdaille Industries, a litt@le-known Florida machine tool company, is.stirring up considerable debate:among top U.S. trade and White House officials. Soon it will land 'on@Ronald Reagan's desk for a final'decision. What is involved is a dan4erous precedent for backdoor protectionism. Whatever its outcome, the petition will have important implications for Japanese industrial polic y , the durability ok established procedures for resolving international trade disputes and--6specially--for credibil- .ity of the Reagan free trade stance. Houdaille Industries is asking the Presiden@ to invoke an obscure provision of the Revenue Act of 19 7 1 to deny to American firms the 10 percent investment tax credit (ITC) if they purcAase-certain Japanese mach'ine tools. Section 103 of the Revenue Act gives the President total discretion to deny the ITC to-imports from'a country that "engages in discrim i natory or other acts (including tolerance' of international cartels) or policies unjustifiably restricting United states commerce." If the President agrees with the petition, it will be the first time the section will have been invoked. Houdaille wants th e President to unsheath this tax weapon because the Japanese machine tool industry, it claims, ha's been cartelized with the tacit approval of the government, and has re6eived substantial government subsidies from export programs and moiorcycle and bicycle racing revenues. The Japanese, on the other hand, maintain that no cartel exits and that the government subsidies are minimal. The U.S. Senate already is lined up with Hoddaille.. On December 21, the Senate passed a nonbinding resolution urging the Presid e nt to grant Houdaille's petition. As the President no%4 makes his decision, he must consider the costs that a rising tide of protectionism would impose on the U.S. economy and consumer. Machine tools are key components of nearly every industrial firm, and particularly to the $200 billion capital goods industry. If the investment tax credit is denied to imports, machinery purchasers either would have to pay 10 percent higher prices for t]4e Japanese imports (since there would be no ITC), or buy U.S. product s which they apparently do not prefer. '-Either alternative would endange@. the worldwide competi- tiveness of U.S. industry and undermine the President's call to retool and modernize the U.S. industrial base. Closely watching what Reagan does is the U.S.. semiconductor industry, telecommunications, robotics and automobile companies. They may be ready to leap into the protectionist queue. Section 103 of the Revenue


Act of 1971 is so open ended and vague that-it up the flood- companie s seeking to shut out'foreign..competition. Foreign countries then could not be expected to watch pl,Acidly as their exports are discriminated against in U.S. markets. As.a:maj'or exporter of capital goods, the-U.S. would 6nd.up'a big loser:if foreign cou n tries retaliated by denying U.S. exports similar tax advantages. The Administration should resist o'pening.thi's.Pandorals box of protectionism. There are already legal proceduri .as available to U.S. companies facing unfair foreign export subsidiesiand t h ese remedies, unlike Section 103, quite properly put the burden' of proof on the com- pany. The Houdaille petition, how@eVer,.t6udhes a much more sensitive -impli . -nerve than alleged subsidization. By cation, it questions the fairness of the Japanese ec o nomic system in genekal. Just how important 'is the Japanese policy of government-industry collaboration? Is it fair to U.S. competitors? Many close observers of thel Japanese system feel that it is fair and that market forces'dominate 'economic decisionm a king in Japan. Even U.S. machine tool industry spokesmen concede that Japanese, manufacturers have succeeded largely by offering!'s most techno- logically advanced machine tools, at the cheapest price, and with the 'the Lest world-wide competitor s .' quickest delivery times@--in short, by beincr 'iation, of which Houdaille 1 Indeed, the National Machine Tool Builder's Assoc is a member, sent a study mission to Japan in 1961 and discovered no significant subsidies to the Japanese machine'tool indust r y and no evidence of a machine tool cartel. As for subsidies in general, itis a sin of.;which the U.S. too is guilty. The-U.S. Export-Import Bank, for instance, provides subsidized long-term loans to purchasers of U.S. exports, tAe Agriculture Department s ets minimum prices for wheat, dairy, and other products, and the Overseas, Private Investment Corporation (OPIC) provides 16an guarantees, advisory services, and insurance against political risk. The Japanese machine tool market is dynamiciand highly comp e titive. The share of Japanese production accounted for b Ithe top five producers y has declined by 30 percent between 1968 and 1981-'-hardly a classic cartel. In short, the Japanese machine tool manufacturers do not appear to owe their 'success to unfair or collusive government.' This won't stop some hard hit American firmg from crying foul, but the President should deny the Houdaille petition:for what it really is: a subtle'form of backdoor protectionism.

Thomas M. Hunibert Walker Fellow in Economics

F or further reading: Regulation magazine, The American Enterprise Insitute, J Anuary/February 1983, pp 6-8. Robert Samuelson,. "Industrial Deception," National Journhl, October 16, 1982, p. 1763. Senator Steve.'Symms, "Fair Trade," Congressional Record.-Janua ry 26, 1983, pp. 66-78.


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