Reckoning

by David Halberstam

  39. THE FALL OF A FREE TRADER

  THE SHOCK WAVES OF these great events soon brought considerable changes in both Ford’s and the UAW’s view of protectionism. The union’s reaction was the more visceral; after all, its workers were immediately threatened. But the company was changing quickly too.

  The Ford Motor Company had been a staunch advocate of free trade since the days of the founder, who had put his signature all over the world. His grandson had made some of his best early speeches on the subject and had symbolized to many in the postwar years the new generation of American business—liberal in its trade policy and enlightened in its dealings with labor. Of course, favoring free trade was natural to a company that was selling millions of dollars’ worth of products abroad each year and was without serious foreign competition. In the mid-1970s, however, the company’s position began to change.

  One of the principal witnesses to that change was a young man named William Niskanen, hired in 1975 as Ford’s chief economist. In the past, both at General Motors and at Ford, economists had been supremely unimportant. Often gifted men and women, they would sit in their offices coming up with brilliant projections only to find that no one paid the slightest bit of attention. There was no need to, in a virtual monopoly. A warning on their part that a particular labor settlement might be too costly simply did not matter, because there was no real competition and the cost could be passed on. Besides, no matter how talented the economists were, they were still minor figures in the chain of command, lieutenants warning the generals above them that the generals were courting disaster. Even when their judgments were independent, they themselves, in the eyes of their superiors, were not. Once the high executives of an auto company had learned to ignore an economist the first time, it was easy to continue.

  Niskanen was different. While not necessarily more talented than many of his Ford predecessors, the forty-two-year-old Niskanen had a considerable reputation in both academia and conservative politics. He had been a professor of economics at Berkeley and was considered a possible candidate for the Council of Economic Advisers should Ronald Reagan or another conservative be elected President, which seemed increasingly likely. Niskanen was, by his own description, a serious conservative ideologue and free-market man. He found his position at Ford an unusual one. He was not powerful within the structure of the company, for he belonged to none of the various duchies of Ford, yet he attended all board meetings, had obvious access to the top people, and was a figure of genuine prestige within the company. Some Ford groups, such as the international people and the legal people, openly solicited his advice. However, he sensed immediately a certain wariness of him among a number of Ed Lundy’s men because he had no established place in the hierarchy and might be prone to give unprogrammed, noncorporate answers. No group better exemplified the culture of Ford, he thought, than Lundy’s: Be smart and quick and play the game right, and the momentum of your superior will pull you right up into the stratosphere. There were always tests, not lightly failed. One Friday, Niskanen—wearing a dark blazer, gray slacks, white shirt, and tie—dropped by Lundy’s office on some business. “Starting the weekend a little early, aren’t you, Bill?” Lundy remarked. No matter how pleasantly it was said, it was unmistakably a rebuke.

  Niskanen was there at exactly the moment the easy years were ending, and thus when the company’s economists were about to become considerably more important. For a variety of reasons, most notably the first oil shock, there was a surge in inflation, which hit Ford in several ways. For one, it made the company’s health costs climb 10 to 15 percent a year. That immediately sent Ford’s labor costs up, because the wages of both autoworkers and steelworkers were indexed to it. The formerly acceptable gap between autoworkers’ wages and those of other industrial workers widened dramatically. At the beginning of the seventies, auto and steel workers made roughly 30 percent more than other industrial workers; by the end of the decade autoworkers made 60 percent more than the average of workers in other industries. (In steel, the difference was 70 percent.) Yet the company seemed oblivious, continuing to operate as if the economy had not undergone a drastic change.

  At one board meeting in 1978, Bill Bourke, the executive vice-president for North America, made a strong pitch for buying Zincrometal, a processed steel coated with zinc that was better at resisting corrosion than ordinary steel. American steel companies did not yet make Zincrometal, but it could be bought from the Japanese, Bourke said, and, what was more, it was not only better than American steel but cheaper. The Canadians, he added, made it too. A heated discussion ensued. Bourke had clearly touched a nerve: He quickly realized there was obviously some kind of gentlemen’s agreement between Ford and the steel companies. “Dammit,” Henry Ford said, “we’re a steel company ourselves, and we’re part of the American steel industry, and I goddam well don’t like us going and buying Japanese and Canadian steel.” Finally a compromise was worked out: Bourke could buy the foreign steel until it was available from American manufacturers. Price was not to be a condition; availability was. Later Bourke decided that this was the last gasp of the old order, of the America immune to economic challenge from the rest of the world, and of cost-be-damned.

  Yet already quality was becoming an issue, although something of a secret one. Ford’s own warranty records clearly indicated mounting problems in manufacture and declining discipline in the work force, but these indications had long been ignored, and now there was blunt confirmation from Hertz of the superiority of Japanese quality. This news badly shook the people at the top of the company. What amazed Niskanen in 1979 was that despite such conclusive evidence on quality and despite the obvious fact that American pay scales were dangerously high, the people at Ford were going on as if it were business as usual. The agreements with the UAW in that year were, in his opinion, obviously inflationary. It was clear to anyone who faced facts that the Japanese had already become very tough competitors, and that one of their advantages was the lower cost of their labor. But Ford sailed along as if the world were still the same. Niskanen knew that the top Ford executives were in a poor position to halt the wage spiral. 1978 had been a very good year, and bonuses for those executives had been phenomenal. Both Caldwell and Bourke had received $630,000 in addition to their salaries. It was not exactly the right time to crack down on the workers. Discipline had to begin at the top, but there was no sign of it.

  Gradually Niskanen watched a great free-trading company—threatened by the Japanese, caught in its own wage cycle—turn toward protectionism. The Ford leadership could see no other way out of its dilemma—a strike might cost $1 million a day. The company needed to revamp its product line, improve its quality, and modify its labor relations, but instead looked for external remedies against the Japanese. It was as if Ford’s new dilemma had been caused only by Japan’s wiliness, its own protectionism, and its skill in keeping the yen soft. Jack Barnes, Ford’s principal Japan watcher, whose job had once seemed unimportant, took on new prominence in 1979. His ideas went right to the top now, to Phil Caldwell. In 1980 a decision was made to go for protectionist legislation.

  As far as Niskanen was concerned, it was a quick-fix solution born of desperation, and he decided to fight it even though it was supported by Phil Caldwell and Will Caldwell—no relation—who had just replaced Ed Lundy as chief financial officer. In one memo Niskanen wrote: “A common commitment to refrain from seeking special favors serves the same economic function as a common commitment to refrain from stealing.” He warned that if the government did help, it would exact a price; the more the government intervened, the more authority it would gain over how the Ford Motor Company did business. That point did not go over well with his superiors, nor did the rest of his dissent. He criticized the hypocrisy of Ford’s calling for protectionism and domestic-content legislation at the same time it was escalating its imports of engines and transmissions from overseas.

  Many executives told Niskanen confidentially that they agreed with his positio
n, but the two Caldwells had a different opinion: In February 1980, much to his surprise, Bill Niskanen was fired. The closest thing to an explanation he got was from Will Caldwell. “In this company, Bill,” he said, “the people who do well wait until they hear their superiors express their views. Then they add something in support of those views.” That seemed to Niskanen a description not of how to do business but of how to amplify mistakes. Niskanen believed he had been fired simply for holding a dissenting opinion. Some of his friends thought he was fired for a different reason: He had come to embarrass those above him at Ford—because he still believed what they had believed in the past.

  He was, one sympathetic colleague noted later, one of the early casualties of a rising new protectionism in America. For all of Japan’s flaws, its own exclusive tendencies, it was hardly Japan’s sins that had made Detroit vulnerable. Certainly Detroit had made only the most halfhearted gestures to open the Japanese market to its products; it had never lobbied very hard to open it, and it had never bothered to ship right-hand-drive cars, which the Japanese used, instead of left-hand-drive cars, which Americans drove. But at this terrible moment, with so much from the recent past to undo, it was a great deal easier to find the villains elsewhere rather than in the Glass House.

  40. AMAYA ENDS AN ERA

  IT HAD BEEN ACKNOWLEDGED at MITI early on that Naohiro Amaya understood the Americans and their politics better than almost anyone else in the ministry and had a highly refined sense of what, in any serious confrontation, America’s most basic positions really were. At the same time, respect for him among the Americans steadily increased. There was a consensus that he played fewer games with them during important negotiations than other Japanese and did not insult their intelligence by poor-mouthing and exaggerating Japan’s vulnerability. He made sure he understood their political realities as well as his own. Furthermore, unlike most Japanese, who seemed eager to gather information but reluctant to volunteer it, he was willing to be honest, and the more he told the Americans, the more open they were with him. Some Americans who had lived in Tokyo during the late fifties had monitored his progress over the year. At early meetings, awkward and diffident in a poorly tailored suit, he had read haltingly from speeches laboriously translated into stilted English. Gradually, however, as if he were a metaphor for his country, he became more confident in appearances before foreigners. Both his English and his clothes got better, and one day, an American diplomat said, he looked up to see an elegant man sitting across from him, poised and eloquent. Amaya had become a master of the verbal jousting that went on at these sessions. When Chalmers Johnson, a distinguished Japanologist and an expert on MITI, teased him about there being only two economics Ph.D.’s in the ministry, Amaya answered that this was true, for running MITI was too important to be left to economists. Then he cited a study he had conducted that showed that the more Nobel laureates in economics a country had, the more likely its economy was to go downhill.

  Because of Amaya’s growing reputation it was not surprising that Japan turned to him when it was time to deal with the burgeoning American pressure for some sort of protection in the field of autos. He was not looking forward to the task, however, since it was not going to be easy to deal with either the Americans or the Japanese. He had been surprised by the speed of the American auto industry’s decline and had serious reservations about its ability to adjust to its new circumstances. As for Japan, he had a very clear sense of how well its resources had been allotted and utilized in the thirty-five years since the war, of how little had been wasted, of how everyone had played his part. Having to tell his countrymen to cut back on exports just as they achieved their goals was going to be painful as well as difficult. It was not the workers he was worried about; as far as he was concerned the Japanese had the best blue-collar workers in the world, men who worked hard, accepted the limits of their lives, and were at once proud of their accomplishments and modest about them. The trouble was likely to be with management, where ambition and ego had always been thinly concealed. With Japan’s industrial rise there had been a comparable decline in their modesty. Many of the men who ran Japanese businesses had begun to believe that they, not the workers or the state, were responsible for Japan’s success.

  The delicate negotiations between the Japanese and the Americans over restrictions on importing Japanese autos to the United States began in 1979. The Americans themselves were divided over the issue of protection. Ford and the UAW wanted relief and were willing to say so, but General Motors, locked into its own free-trade rhetoric, was reluctant to advocate a limit; it might want one, for it was suffering too, but it was not going to go on the record as calling for one. The Carter administration was divided as well. The chief split was between those advisers who based their judgments on the economy as a whole and those who represented various afflicted constituencies. Charles Schultze, President Jimmy Carter’s chairman of the Council of Economic Advisers, was particularly opposed to protection. As far as he was concerned, Detroit’s problems were completely of its own making, and the blame fell on both management and labor. Labor contracts had become too inflationary in the last decade, he argued; he was indignant that the industry, aware of the new economic realities in 1979—higher gas prices, the growing alienation of American car buyers, tougher competition from abroad—had nonetheless given the union a settlement that placed it at 60 percent above the American manufacturing norm. Now he felt that Detroit was asking the government to validate its bad management practices.

  Carter was also reluctant to aid Detroit. Not only did he have a populist’s wariness of auto men, but he also felt frustrated by them because he had pushed them in the past to make their cars smaller and they had not been very responsive. On the other hand, Carter had human and political sympathies for the 250,000 auto workers who were out of work. While his administration did not carry as much of an ideological free-trade burden as the one that was to succeed it, some members were also strongly opposed to any intervention for fear that it would set off antitrust suits, brought by American dealers who handled imports.

  It became obvious, however, that the crucial decision might not be made under Carter. His administration was soon forced to invest its final energies in the attempt to solve the Iranian hostage crisis. Dealing with the Japanese became the problem of the entering Reagan administration, which, although far warier of imposing trade restrictions, also held conflicting opinions. Ronald Reagan, the first truly conservative President elected in more than half a century, was a firm believer in free-market economics. Murray Weidenbaum, the chairman of the Council of Economic Advisers, shared the view of his predecessor Schultze that import restrictions were inflationary. However, some politicians with good connections—particularly former senator Bill Brock, who was the administration’s international trade negotiator—held differing opinions. By early March 1981, Brock was saying that limited restraints on the Japanese might be politically acceptable. To add to the discord, Brock and Secretary of State Alexander Haig wrangled over whose domain the negotiations should fall in.

  Toward the end of its time in office the Carter administration had given clear signals to the Japanese to come up with some voluntary restrictions. The Japanese, realizing it was very early in the negotiations and that a new administration might well be coming in, pretended not to hear. By the time Reagan took office the auto industry was in desperate trouble. Interest rates bounced between 15 and 21 percent, making it terribly difficult for Americans to buy cars, especially the more expensive domestic models. Finally the Reagan administration, too, despite Murray Weidenbaum’s objections, decided to ask the Japanese to suggest a voluntary ceiling on their exports into America.

  The Japanese auto industry had immense influence within the ruling party in the Japanese Diet. When American requests for voluntary restrictions grew more pointed in 1980, leading members of the party, pushed by the heads of the Japanese auto companies, made a trip to Washington to let the Americans know they could not be s
queezed on this issue. The Americans had never been very tough on the Japanese in the past, and the delegation had no reason to believe that anything had changed. This time, though, the Japanese faced a new political climate. The troubles of the American auto industry were creating widespread anti-Japanese feeling, which was now reflected in Washington. The Japanese were accustomed to militant opposition in Europe, but encountering it in America was a shock. Their earlier adversaries, like Senator John Danforth of Missouri, were angrier than ever, and now there were many new ones. Previous allies, along with the top lobbyists the Japanese had been using to great effect, now claimed they could no longer protect the foreigners. The Diet members had gone to America expecting to make a stand; instead they were absolutely flattened. The American economy was momentarily in shambles. Much of the unemployment seemed to come from the auto industry. Because of that there was a swelling protectionism in Washington. Their own core economy in jeopardy for the first time since the war, Americans were looking long and hard at Japan, and they were dismayed by its own protectionism. Japan must bend, and bend quickly, on auto or risk harsh legislation, the Diet members reported back. With this threat, serious negotiations began between the two countries. Brock represented the Americans. He played it very cool. I’m as much for free trade as you are, went his line, but we have to face some very serious political realities here. I’m not asking you for anything, in fact I’m here to help you. People like Danforth are gaining support all the time, so your friends, like me, are worried about you.

  The bargaining sessions were long and arduous. When Amaya had negotiated with the Americans before, it had always been over the issue of a troubled sector of an essentially vibrant economy. Now that so vital a part of the American economy was in peril, the Americans seemed to have lost the quality that had most impressed Amaya in the past: their complete confidence in themselves. Amaya estimated the figure needed by the two big Japanese manufacturers to keep their balance sheets in the black, and then he estimated the figure that would allow the Americans to salvage their pride and to repair their ability to make better cars. Then he decided the two points he would insist upon. First, he wanted the ceiling to be a fixed number rather than a percentage of the previous year’s total—so the Japanese would not suffer if American sales plummeted further. Second, he wanted to keep the Americans from setting categories by size or price: The Japanese did not want to be locked into exporting small cars; they wanted a chance to move into the more profitable middle range.