Trade Policy: What Next?

The anti-globalization forces of Seattle who swept through Washington, D.C., last May may have caused only minor disruptions of the spring meetings of the International Monetary Fund and the World Bank, but they provided an apt symbol for the directionless condition of trade policy in the United States and elsewhere today.

To be sure, there are some bright spots. In April, at long last, Congress voted to give duty—free status to apparel made in some of the world’s poorest countries—Africa, the Caribbean, and Central America. In September, in one of the most closely watched votes of the year on any matter on Capitol Hill, the Senate joined the House in approving permanent normal trade status for China, paving the way for its unconditional acceptance into the World Trade Organization.

Yet the larger trade agenda remains in disarray. While Patrick Buchanan and Ralph Nader have outlined a clear vision of trade policy that would move the process backward, both Al Gore and George Bush have largely steered away from the issue. Meanwhile, much of the American public is ambivalent, if not hostile, to further liberalization. Not surprisingly, one hears little these days about a new administration seeking “fast track” negotiating authority to speed Senate consideration of new trade agreements.

In such a political climate, where should U.S. trade policy be headed after the next president takes office? Here are the pros and cons of three alternative paths, with a modest suggestion at the end.

Do Nothing

The best case for doing nothing rests on the view that the economic forces driving globalization—lower communications and transportation costs and the demand of consumers around the world for better and cheaper goods and services—are too strong to be stopped, especially given the rapid growth of global e-commerce. On this view, starting new trade negotiations now could be counterproductive, especially if the price of any deal is to allow trade sanctions against countries that fail to adopt and enforce certain minimum labor and environmental standards. In that event, poorer countries in particular could be stopped by advanced countries from using trade to improve their citizens’ living standards, as many have done over the past several decades.

The advocates of a “do nothing” strategy are right to stress the importance of market forces in furthering globalization. But the risks of pursuing that course are great, especially for the United States, which has been the leading champion of trade liberalization since the end of World War II. If Washington doesn’t continue to lead this cause, U.S. firms risk getting cut out of regional deals that give preferences to other countries—which, ironically, would only encourage U.S. companies to move abroad to take advantage of those preferences. Moreover, if there is no pressure to move forward on the trade front, demands to return to various forms of protection surely will mount over time and could easily triumph if our economy and others fall into recession.

The cyber-optimists of today should not forget that globalization was stopped dead in its tracks between World War I and World War II by a wave of protectionism. Policymakers, driven by popular passions or protests on the street, can always make the mistake again.

Incrementalism

A second strategy is to pursue incremental liberalization, either by subject matter, by country, or by region.

The subject matter approach would carry on the so-called “built-in” agenda from the Uruguay Round, the series of world trade negotiations that concluded in 1994 and was implemented in 1995, by seeking to accelerate the phase-out of remaining barriers to freer trade in agricultural products, textiles, and services. A main advantage of this option is that it seems unlikely to arouse the strong passions of all those opposed to globalization. Because it would concentrate only on sectors the world trading community has already targeted for further negotiations, it need not involve thorny issues like labor and environmental standards and other controversial topics such as antidumping policy and barriers to foreign investment. The drawback to pursuing this narrow agenda, however, is that it affords few opportunities for tradeoffs—potentially a major stumbling block because textile protection in the United States and agricultural subsidies in Europe are political third rails in their own right. Without the opportunity to build broader constituencies for a deal across many other sectors, negotiators may not be able to make much progress.

The other incremental strategy is to negotiate more bilateral or regional free trade areas (FTAs), like the ones the United States already has with Canada, Mexico, and Israel. That might be easier to accomplish politically, depending on the country seeking the FTA, than a textiles-agriculture-services deal.

But the NAFTA experience teaches that entering into FTAs with countries significantly poorer than the United States—such as India and other potentially willing partners in Latin America-arouses strong passions and claims (however bogus) that such deals will promote a race to the bottom in wages and labor and environmental standards. Even if bilateral deals are limited to a few sectoral issues, they run afoul of WTO requirements that FTAs be more comprehensive. Meanwhile, with the World Trade Organization under political pressure from foes of globalization, arranging bilateral trade agreements with richer countries—assuming any would be willing to try, a big “if”—could erode support for multilateral trade liberalization, which this country has long championed as a way to avoid fragmenting the world trading system. Poor nations would rightly see the rich countries as trying to raise the trade drawbridge, leaving them to fall further behind.

A Whole New Round

Precisely for this reason, the United States has devoted its main energies over the past five decades to liberalizing trade among many countries at the same time, first through the General Agreement on Tariffs and Trade (GATT) and, since 1995, through the WTO. The approach seems to have worked. Average tariffs worldwide have fallen to about 5 percent, and trade has grown roughly twice as fast as output. Having access to cheaper goods has benefited consumers worldwide. Indeed, estimates by the president’s Council of Economic Advisers imply that since 1960, freer trade has raised the purchasing power of the average American at least $1,000 every year.

But many barriers to trade remain standing. Tariffs on individual products—especially agricultural goods—in various countries are still high. And countries like Mexico and India, among others, increasingly are following the U.S. lead in using antidumping penalties to replace tariffs as a way to protect their local industries. Europeans don’t want to import genetically modified foods—despite claims by U.S. authorities that they are safe—while insisting that the WTO put in place at least minimum international standards on competition policies—such as a prohibition on price-fixing and other cartel-like behavior-which U.S. antitrust authorities have resisted, fearing that U.S. standards could be watered down in the process. Meanwhile, the Clinton administration has insisted that future trade deals in some fashion (not clearly specified) also lift standards in developing countries governing labor and the environment, a course stoutly opposed by these countries, who fear that the issue is being pressed as a new disguise for preventing the importation of the goods they are now selling to the developed world. Then there is the built-in subject matter agenda—further liberalization in services, agriculture, and textiles-left over from the Uruguay Round.

In short, if the next president were willing to launch it, the next multilateral trade round could be fruitful. Lifting the remaining barriers to trade could generate hundreds of billions of dollars in extra purchasing power for consumers throughout the world (in fact, more than $600 billion by 2010, according to simulations using a model developed by Warwick McKibbin of Brookings).

The main drawback to another large trade round, if the past is any guide, is that it could be a long, drawn-out affair, with no result likely in the first term of the next president. And the public, at least that in the developed world, does not appear ready for such an ambitious undertaking. Anxieties about job loss and wage erosion persist, and political leaders, especially in the United States, have done little directly so far to ease them other than to applaud the general strength of the economy.

Addressing Anxiety about Globalization

In the 1992 presidential campaign, Bill Clinton promised to provide support for education and retraining to help workers adapt to the increasingly high-tech, global economy. Eight years later, the promise has been only partly met. At the president’s urging, Congress enacted tax credits for workers who want to go school at least half-time. Congress also has continued to fund, at a relatively low level, adjustment for workers displaced by trade. But the public’s anxiety about job loss-for reasons that extend well beyond trade-continues, despite record low unemployment.

Support for further trade liberalization, which is necessary at the very least to prevent a backsliding toward greater protection, is not likely to grow unless federal policymakers address worker anxiety head on. Several measures would help.

First, workers should be allowed to borrow from the federal government, up to some limit, to finance their training at any point in their working lives (without necessarily having to quit their jobs or work half-time, as the current tax credits effectively require).

Second, workers should have access to “wage insurance,” which would compensate them for some portion of their income losses after displacement and after finding a new job, up to some limit.

Third, subject to a means test, the federal government should help unemployed workers purchase health insurance. (Jobless workers now have the right to continue buying the insurance for 18 months but have a hard time paying for it.)

In the meantime, the United States should defuse the controversy over labor and environmental standards by strengthening the International Labor Organization, the body that deals with labor issues, and by creating new standing bodies to address cross-border environmental issues. Any rules these organizations make should take into account the particular stage of economic development of the countries involved, with sanctions best applied in the form of publicity (especially through the Internet) about the countries’ adherence to these standards, so that consumers around the world can vote with their dollars whether to punish substandard nations. Furthermore, the WTO’s dispute resolution process should be opened up so that the panels accept briefs from private parties, including nongovernmental organizations, much as the U.S. Supreme Court now does with amicus briefs. Any resulting increase in the WTO’s less-than-$200-million budget would be modest, and Washington should be willing to help foot the bill.

After first taking concrete steps to address the anxieties generated by globalization, policymakers can go back to the hard work of removing the remaining barriers (although in the meantime, negotiators should work on an agenda that could be presented at an appropriate time). Ideally, the effort should be multilateral, but perhaps the issues could be grouped so that certain agreements can be “harvested” early without waiting for the whole package to be approved. But none of this has a prayer of happening unless the next president is willing to spend some of his political capital on the overall effort. The rewards of pushing for free trade could be substantial. Doing nothing risks a backlash against globalization, which would punish consumers here and around the world.