President Reagan confronts one of the most important decisions of his fledging administration. It is important because it will help set the nation's economic direction and signal that the US government is committed to the principles of free trade and market economics -- or, on the contrary, that it is headed down the path of protectionism. The issue is whether to ask Japan to limit its car exports to the United States in an effort to help the depressed American auto industry.
Is such relief justified? Not as we see it.
Of course no one wants the American manufacturers to go out of business. The US needs them: once the carmakers solve their self-created problems, they can again contribute solidly to the economy; also, a sturdy domestic auto industry is essential to defense. This is why the government has come to the rescue of Chrysler. But now General Motors and Ford are also feeling the competitive heat and asking for help in the form of quotas on Japanese imports -- either through voluntary restraint or a legislated agreement.
The American people will want to ask: have the faltering auto companies done enough to help themselves, and what would be the impact on consumer pocketbooks, i.e., on inflation, of an import restriction?
On neither score is the answer reassuring. The fact is that GM and Ford are in trouble because they have priced themselves out of the market. And they have priced themselves out of the market because they have not cinched their belt and moderated wage settlements. Economist Charles Schultze writes in the Wall Street Journal that, because of the increasingly generous labor contracts negotiated in the past, wages and fringes in the auto industry today are about 60 percent above the average in manufacturing as a whole. Now the industry and the United Auto Workers, he says, want the government to make possible the price increases necessary to pay for these labor gains by curbing Japanese imports.
Why should the American consumer have to pay (higher prices for cars and taxes to support subsidies) when the industry itself --management and labor -- is unwilling to bite the bullet? Mr. Schultze's arguments are compelling. He notes the adverse impact on inflation of spiraling wage settlements in government-aided industries (including, for instance, steel). By placing formal or informal restraints on imports from Japan, he warns, the administration would simply give GM and Ford a green light to continue negotiating inflationary wage packages. Refusing to do so, on the other hand, should improve the climate throughout industry for moderating wages and prices. Certainly addressing the extreme wage gains won in such key industries as autos and steel is as crucial to curbing inflation as efforts to reduce the budget deficit.
A curb on the imports of Toyotas, Datsuns, and other Japanese cars may sound an easy way out. But Americans must not be fooled into thinking such a move would be without consequence to them. It would result in higher prices for Japanese and US cars, it would dilute the beneficial pressure which the Japanese imports have put on US industry to shape up, and it could erode the free-trade principles making it possible for American goods to compete in the world market. The US in effect might damage itself more than Japan.
Hard-hearted as it might sound, the Detroit car industry should not be gotten off the hook. The UAW had to face up to excessive wages at Chrysler and it should do the same at Ford and GM. President Reagan conspicuously has not addressed the problem of wage-price increases in the private sector, but he has an opportunity now to show that his determination and courage extend to this critical area of the battle against inflation.