Last week, the United States stepped toward imposing taxes on Scottish wool, Spanish leather and other European products in retaliation for rules that supposedly discriminate against U.S. banana distributors. Pat Buchanan entered the presidential race, promising to make trade a focus of his populist campaign.

The week before that, the United States and Russia negotiated "voluntary" restrictions on cheap Russian steel sold to U.S. buyers.

Since World War II, the United States has led efforts to liberalize world trade. But as these events suggest, free trade is under increasing attack -- both in the United States and the world.

For many Americans, free trade is puzzling and contradictory, the stuff of dueling sound bites and scarce explanation. Jay Hancock of The Sun's business staff offers some background:

What's free trade?

It's the unrestricted flow of products across political boundaries. "Free" means free from import prohibitions, taxes and other obstacles.

Historically, long-distance trade has mainly involved goods -- commodities or manufactured products loaded in a truck or hoisted on a ship.

But more recently, international trade has embraced services, too. A Frenchman staying in a Baltimore hotel, a Towson architect designing an office building in Mexico City -- those are service exports.

Recent financial crises in developing countries in Asia and South America have renewed debate about the free flow of capital -- the sloshing of foreign money in and out of stock and bond markets. While capital flow falls loosely into the "trade" category, it's usually discussed separately.

What's so great about free trade?

It's great for consumers. The world is a big place, offering endless variety of products with many combinations of quality, features and price. No one country, not even one hemisphere, has it all. Expanding the marketplace expands choices. And it increases competition among producers, ensuring their utmost striving toward quality and affordability.

One of the free-traders' favorite case studies is the U.S. car industry. Inexpensive, reliable Japanese imports during the 1970s forced Ford, General Motors and Chrysler to drastically improve, which in turn goaded the Japanese to new achievement.

Consumers won.

But didn't U.S. automakers close factories and lay off tens of thousands of American workers? They certainly didn't win.

No. American consumers' gain was American auto workers' loss, at least temporarily. That's the damage that often results from free trade.

That doesn't seem like an even deal. Wouldn't it make sense to block imports and force consumers to accept the slightly higher prices and lower selection that came with it if it meant protecting U.S. jobs?

That's the essential argument of protectionists. They think the United States is big enough and smart enough to make more of what it needs inside its borders. Trade barriers would help ensure that products used by Americans were made by Americans, thus funneling this country's buying power mainly into the wallets of its work force.

So what's wrong with that?

For one thing, millions of U.S. jobs depend on exports -- the sale of U.S.-made products to foreigners. Protection invites retaliation. If we slap 100 percent tariffs on Italian cheese and Belgian cookies, as the Clinton administration is threatening to do, Europe might do the same on U.S. food products, hurting American workers.

There are 270 million Americans and 5.8 billion of everybody else. Vistas for U.S. workers are wider and brighter when they can sell their labor to the entire world, free-traders argue.

But foreigners sell far more to the United States than vice versa. Last year, this country paid $168.8 billion more to foreign producers than they spent here -- the trade deficit. At that rate we'll run low on cash.

That's what 18th-century mercantilists thought. They measured economic success by how much money piled up within their borders.

But economists have shown that national wealth comes from more than just hoarding cash. Fairly simple math shows that when two countries trade with each other, both benefit economically even when their skills and cost of production vary sharply.

Perhaps as important, free trade is strongly associated with economic growth. Unbound commerce seems to breed the innovation, risk-taking and toil that commonly lead to productivity growth. And productivity growth -- making more with fewer resources -- is the key to rising incomes and wealth.

Economists don't agree on much, but most of them favor free trade and decry protectionism.

Many analysts blame the Great Depression on worldwide tariffs in the 1930s. Nobelist Milton Friedman's favorite free-trade example is Hong Kong, whose unfettered economy has boomed since World War II despite its small size and poverty of natural resources. Many historians argue that United States grew powerful partially because it banned state tariffs and other interstate trade walls.

So does that mean we shouldn't worry about the trade deficit?

No. We should. How much to worry is what starts arguments. With a trade deficit of $169 billion a year, the United States has to borrow more than $3 billion a week, every week, to pay its overseas shopping bills. So far the world has lent the money, but economists worry that some shock might evaporate foreign credit, drive up U.S. interest rates and cause a recession.

But other analysts describe last year's big deficit as a temporary, harmless result of a booming U.S. economy and weakness almost everywhere else. It's no surprise that the United States is buying more from abroad than vice versa. The trade deficit will fall, they argue, when the world economy moves back toward equilibrium.

And besides, they point out, the deficit is still less, as a percentage of the economy, than it was in the 1980s.

If free trade is so beneficial, what do you tell the millions of Americans laid off from shoe factories, sewing operations, steel mills and other manufacturing operations as a result of imports?

Even its most ardent advocates admit that free trade causes painful economic casualties. They just believe that, for the country and especially the world, free trade's benefits outweigh its damage. And perhaps the biggest of those benefits, they argue, is international peace.

Countries that trade with each other tend not to go to war with each other.

Are free trade or isolation the only options? Couldn't we protect certain industries with finely tuned barriers?

Some people think so. Even Buchanan, a vehement free-trade critic, doesn't want to ban imports. Many people favor penalties against "dumping," when foreign companies sell products here below cost. That's the charge flung by the U.S. steel industry at its foreign rivals. And most people see sense in at least some restrictions -- on nuclear bombs, for example.

But many others are leery of almost any adulteration of free trade. For one thing, they fear escalating trade wars that would hurt everybody, and they point to the tussle over bananas.

The row started over European restrictions on Latin American bananas grown by U.S. companies. Now it threatens to spread to cheese, wallets, sweaters and beyond.

Pub Date: 3/07/99