July 14, 2003
by Irwin Stelzer
Economists agree that a progressive freeing of trade contributed importantly to world economic growth since World War II. With the world economy best described as fragile, many policymakers are pinning their hopes for a return to growth on a successful conclusion of the so-called Doha round of multinational trade negotiations now underway at the World Trade Organization (WTO). If barriers to trade can be cleared away, poorer countries will find it easier to market their agricultural goods, American companies will find new markets for their high-tech goods and financial services, European manufacturers will gain access to nations now intent on protecting their domestic companies, and consumers will benefit from the lower prices that result from the efficient international division of labor. True when Adam Smith said it, true today.
Which is why close observers of emerging policies toward trade are more than a little concerned with recent developments. America, which is leading the drive for freer trade, enters the discussion with less than an unblemished record. President Bush has shown that he will raise tariffs when it is to his political advantage, as was the case when, over the vigorous objections of his economic team, he levied the steel tariffs that the WTO on Friday held to be in violation of its rules (America will appeal).
More controversially, Bush and his Trade Representative, Bob Zoellick, have adopted a policy of negotiating bilateral free trade agreements (FTAs) with countries from Chile to Singapore to Bahrain to Morocco. The most important one now being negotiated is with Australia, a country with a special claim on American sympathies because its soldiers fought alongside American forces in the six wars of the past and present century (World Wars I and II, Korea, Vietnam, and the two Gulf wars). Whether a deal will be struck may depend on the willingness of America’s farm-state senators to countenance a bit more competition from Australian farmers, which Australia’s ambassador to the United States, Michael Thawley, tells me he hopes to convince them would be in their long-run interest, and whether the Australians can move toward the American position on the protection of intellectual property.
These bilateral deals have caused a huge stir. Many critics say that the United States is using its muscle to get weaker countries to negotiate with it, mano-a-mano, rather than allow them to aggregate their power in a world-wide round. Zoellick denies that. He tells me, “Countries seek FTAs with the United States . . . [because] open access to the largest and most dynamic economy in the world is highly prized and . . . [because] some countries use the process of negotiating an FTA . . . to spur and support their own domestic reforms.” In his view, FTAs promote “a competition in liberalization,” and can provide more detailed protection of intellectual property rights than the more generalized multinational Doha round can produce.
Besides, adds Zoellick, the FTAs are definitely not an alternative to the multinational WTO negotiations. America’s aims to lower worldwide barriers to trade, and has offered “to eliminate tariffs on goods and to slash agricultural barriers and subsidies . . . if others join us.”
Unfortunately, “others”—which may be diplospeak for the European Union (EU)—aren’t jumping on the free trade bandwagon. Despite some minor rejiggling of the EU subsidy program, French farmers remain among the world’s most cosseted, paid to produce goods that compete unfairly not only with American agricultural products, but with the produce of desperately poor African farmers. And the recent decision of the European parliament to impose a virtually unworkable labeling system on genetically modified food products has irked Bush and prompted Zoellick to pursue U.S. complaint at the WTO.
A final strain on the world trading system is America’s decision to use trade policy for purposes other than stimulating trade. Here, the record is unclear. A trade agreement has been signed with Chile, which did not support the United States when we sought Security Council approval for moving against Saddam, and one is being negotiated with South Africa, despite Nelson Mandela’s vitriolic and personal attack on Bush for “unleashing a holocaust” by invading Iraq, and his snub when the president visited South Africa last week. Mandela had time for Beckham, but not for Bush.
On the other hand, Zoellick says “We are trying to make the United States’ foreign, economic, and security policies mutually supportive.” That can only mean that free trade might, at times, take a backseat to a policy of rewarding friends and punishing enemies.
So one side of the table we have Americans negotiators willing to consider policy imperatives other than the extension of free trade, and on the other Europeans determined to maintain protection in the three “A”s that are so important to America: agriculture, by subsidizing inefficient farmers; aircraft, by subsidizing AirBus; and audio-visual products, by imposing direct quotas.
In that atmosphere, Zoellick has quite sensibly decided that the half-loaf of a series of bilateral deals is better than the no-loaf of a possibly unattainable worldwide deal at the Doha round. Press on for a worldwide deal, using FTAs as a stick with which to prod the reluctant to sign on, but don’t lock America into an all-or-nothing bet.
To add to this stew we have Japan and China. Both countries have refused to allow their currencies to rise relative to the declining dollar, instead holding down the value of the yen and renminbi, respectively, to stimulate exports. This antagonizes America, which wants to see its trade deficit come down, and the euro area, which is forced to bear the brunt of the fall in the dollar’s value.
Put all of these problem together, and they spell trouble for the system of more-or-less open trade that has contributed so much to progress since World War II. Zoellick, however, remains optimistic: “Every country wants freer trade. We’ll get there.”
This article appeared in London’s Sunday Times on July 13, 2003.
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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