Trading Places

Lael Brainard
Lael Brainard National Economic Advisor - National Economic Council

July 1, 2001

There are many opportunities to advance trade liberalization—if the U.S. seeks them.

The jury is still out on whether President Bush will be able to score major trade victories. Many have predicted smooth sailing based on the recent Republican unity on tax cuts in the House of Representatives, the tradition of bipartisan support for trade in the Senate, and the momentum created by President Clinton’s victory on the vote to grant China permanent normalized trade relations. In reality, the picture is much more complicated both at home and abroad.

America needs a trade strategy that navigates the rocky shoals between the priorities of key domestic groups and the interests of disparate foreign trade partners. There is a way forward, but it involves substantial risks.

First, progress on trade abroad hinges on building broad political support at home. There is an enticing opportunity for a Republican president to borrow a page from his predecessor’s gamebook and pursue a “triangulation” strategy on trade, addressing the concerns of those whose jobs are threatened, and exploring constructive ways to improve labor and environmental protections in developing countries. Short of this, it would be better to postpone the fast track debate indefinitely than pursue a partisan bill that could result in polarization at home and signal paralysis abroad.

Second, any meaningful trade agenda must encompass the World Trade Organization (WTO). The status quo option of remaining on the sidelines, which many have advocated in the wake of Seattle, is not in America’s national interest. Related to this, any successful strategy must respond to the legitimate interests of poorer nations.

Finally, America should strategically pursue a limited set of regional and bilateral agreements—rather than opportunistically agreeing to a confused patchwork of initiatives. The Free Trade Area of the Americas (FTAA) meets this bar, by helping to nurture the seeds of democracy and market reform throughout Latin America, but the Pacific 5 (P5) and several bilateral candidates do not.

Increasingly, observers on both sides of the trade debate are asking whether it is necessary or wise for America to take an activist posture on global trade talks. Even free traders wonder whether the incremental economic gains are worth the requisite political compromises.

Having been burned at Seattle, America understandably might view pursuit of a new Round as a big risk. But taking important risks for compelling reasons is what leadership is all about. And leadership on the global trade system is in America’s national interest. Geopolitically, as a global power, America has a strong interest in shaping the WTO, the only global trade forum that represents nations from all regions and levels of development. Economically, global always trumps regional and bilateral; producers should be scanning the globe for the best market opportunities, not the best special deals negotiated between governments. Pragmatically, there is particular urgency because of the expiration two years hence of the so-called “peace clause” preventing disputes between the United States and European Union on agriculture.

Market access should be the central thrust of the next Round. This is in America’s interest. It is also the strongest point of common interest with developing nations, who share deep misgivings at the prospect of a broad Round mandating major changes in domestic regulation. One could reasonably expect special progress in areas of America’s competitive strengths: agriculture and services, since these are the unfinished business of the last Round.

Launching a Round is achievable, if we pursue limited goals informed by political reality rather than a technocrat’s wish list. America’s offensive agenda includes ambitious goals for agricultural and services liberalization—where we have many allies—and modest goals on social issues—where we have few allies. The key defensive points are on antidumping and protection in a few vulnerable sectors. Getting to yes on a Round requires accommodations on three fronts: with the EU, Japan, and key developing countries.

With Europe, U.S. Trade Representative Robert Zoellick and EU Trade Commissioner Pascal Lamy must leverage their much touted friendship to agree an agenda that is acceptable to key constituencies on both sides of the Atlantic. The EU’s greatest sensitivities are on agriculture, the environment, and food safety. Truth be told, the European Commission (EC) has a considerable interest in getting dragged to the table on agriculture, enabling it to lay the blame elsewhere for internal reforms that are anyway essential if big agricultural producers like Poland are to join the EU without wrecking the budget.

In return, the EC must get enough diversionary issues such as investment and competition policy on the table to persuade recalcitrant members to accept agricultural terms resembling those negotiated in Seattle. The United States can stand down as a central protagonist on these diversionary issues, recognizing that the scope will be circumscribed through the efforts of key developing countries. On labor and the environment, the EU and the United States have different priorities and can agree to pursue them separately. The EU’s indifference to U.S. goals on the social agenda is striking given Europe’s strong social charter and the predominance of center left governments. But one has to look no farther than the EU’s overweening agenda on trade and the environment driven by its powerful environmental constituencies to understand Europe’s ardent courting of developing countries in other areas. The Bush administration would be well advised to start out in a moderating posture on the trade-related environment issues, given its initial clumsiness on climate change diplomacy vis-a-vis the EU and strong opposition from developing countries.

For Japan and a few others, such as Korea, antidumping is the heart of the issue, driven by the steel industry. Going into Seattle, Japan opposed a Round, and the stalemate over antidumping served as a convenient foil. Recent political and economic developments may have heightened Japan’s interest in a Round. To move forward, Japan must accept the hard truth that there is little flexibility in the United States on antidumping given strong bipartisan opposition, especially against the backdrop of sharp job losses in steel and the manufacturing slowdown. The strongest action Congress has taken on trade so far this year is a letter signed by sixty-two senators signaling strong opposition to any agreement weakening U.S. trade remedy laws. The United States will have to accept the equally hard truth that antidumping cannot be taken off the table completely. There is scope for accommodation with Japan on a work program circumscribed to the administration of existing antidumping laws. Indeed, the United States has a growing interest in the fair and transparent administration of foreign laws, since several Latin American countries are increasingly resorting to their own antidumping procedures.

Any successful strategy must deal squarely and fairly with the interests of poorer nations. (Although the “developing countries” are effective as a blocking coalition, in fact there is a vast diversity of interests among this group.)

Agricultural liberalization is the single biggest prize for many of the poor countries. On a per capita basis, the EU provides more agricultural support than the per capita annual income of the eleven poorest countries. Developing countries also have a strong interest in expanding access into highly protected industrial sectors. The United States can show flexibility at the outset by agreeing to include these in the negotiations without committing to any particular reductions. Moreover, restructuring is already underway in several domestic industries in response to NAFTA and existing trade preference programs, where expanded access will be felt mostly in a shift of import patterns rather than domestic displacement.

More broadly, the United States should support expanded overall access for the reform-oriented poorest nations consistent with our preference for market-driven development. Already, America offers among the most generous preferential access in the world, and there is scope to do more. However, special access for the poorest is opposed by many middle-income countries who see themselves as the losers.

There is also scope to address concerns about implementation. Michael Finger of the World Bank estimates that a typical developing country must spend $ 150 million to implement just three of the WTO’s many agreements—a hefty share of the overall budget for many countries. For countries committed to reform, which are hampered by weak institutions, limited resources, and a range of competing poverty reduction and development goals, it is not difficult to conceive a constructive approach. Rather than resorting in the first instance to litigation and punitive trade sanctions, the developed countries should provide technical assistance and permit flexibility on deadlines in return for a commitment to a detailed work program and timeline for compliance. In addition, there may be special circumstances, such as the HIV/AIDs crisis in Africa, which warrant a deviation from standard practice.

Third, many poor nations have legitimate concerns about representation in the WTO. Although in principle a consensus organization, in practice the WTO lends itself to agenda setting by a small group of nations through a nontransparent, ad hoc process. The United States should support calls for institutional reform of the WTO to proceed in parallel with rather than as a precondition for the launch of negotiations.

Finally, it is important to keep in mind that trade is a necessary but by no means sufficient driver of growth in the developing world. The United States must continue to work actively to build public support for a more robust development agenda, just as the poor countries themselves must lay solid domestic foundations for broad-based growth.

There is no hope for reinvigorating the WTO as long as two of the central protagonists are on the brink of a $ 4 billion retaliation. The United States and EU are bending the dispute settlement system to the point of breaking by pursuing litigious brinkmanship with no clear exit strategy. The only path out of continued escalation is a negotiated solution with concessions on each side.

Both have already made a downpayment on restoring goodwill by resolving the long festering “bananas” dispute. Next, the EU should blink on its case against the U.S. Foreign Sales Corporation (FSC) tax break for exports. The EU can orchestrate a gracious exit by declaring victory over the U.S. FSC replacement legislation passed with strong bipartisan support, which responds to the spirit of the EU’s complaint, and demanding modest concessions on the administration of the new law. By all accounts, this is a case with no real EU constituency and involving no real economic damage. On its side, the EU will require resolution of the US$ 117 million dispute on beef. With the requisite political will, the EU and the United States could move quickly to a compromise allowing the United States to expand its exports of “hormone free” beef.

As a general rule, America should pursue regional and bilateral trade agreements strategically rather than opportunistically. The regionalism debate is polarized between the promiscuous advocacy of entering into relations with any willing partner, and the puritanical condemnation of regional trade arrangements as always and everywhere detrimental to free trade. Experience lies somewhere in between. Regional agreements can move forward the global framework by pioneering deeper and broader disciplines, reinforcing rather than distorting natural trade patterns, and spurring a virtuous cycle of competitive market opening. But it is foolish to underestimate the substantial political capital required, the risk that domestic backlash could undermine broader liberalization, and the potential for regional blocs to stymie rather than spur multilateral progress. Thus, free trade agreements should be pursued only where the economic and security gains warrant the political cost, they contribute to a competitive dynamic that strengthens the multilateral trade framework, and there is a commitment to plough new territory.

The FTAA meets these tests. Latin American attitudes towards trade and market reform have undergone a sea change. With the notable exception of Brazil, key countries have signaled eagerness to expand trade with the United States, whether individually or in groups. It is manifestly in our interest to nurture the seeds of democracy and market reform by anchoring Latin American economies in a framework of rules and an expanded market, helping to attract productive investment, reduce the scope for government meddling, and promote broadly shared prosperity. Properly constructed, the FTAA could also address trade distortions created by NAFTA and spur otherwise reluctant countries to the world negotiating table. But the domestic political cost will be considerable, as it has been with NAFTA. (On a sobering note, although the foreign policy rationale for the FTAA is strong, the economic gains to the United States are likely to be modest. The western hemisphere overall accounts for 38 percent of U.S. trade, but only 7 percent of U.S. trade is with countries other than Mexico and Canada, which are already covered by NAFTA.)

The bilateral trade negotiation with Chile can be justified on related grounds. America’s negotiating position within the FTAA will be greatly strengthened if we can demonstrate the capacity to consummate an agreement. Moreover, Chile has demonstrated willingness to meet the high level of standards pioneered in NAFTA, including by addressing labor and environmental issues. The United States should also respond favorably to overtures from Argentina, which could help generate a liberalizing competitive dynamic vis-a-vis Brazil and give Argentine investors a needed psychological boost.

The potential for a trade agreement spanning the Pacific is much murkier. One thing is clear: APEC is not a promising forum for such an agreement. Some have proposed a “P5” negotiation encompassing Australia, New Zealand, Chile, Singapore, and the United States as an alternative means to advance liberalization without paying a steep political price in the United States. The difficulty with this analysis is threefold. First, meaningful opening implies significantly greater access for competitive agricultural products from Australia and New Zealand (such as lamb and dairy), which will meet stiff U.S. resistance. Second, the economic gains for the United States would be modest, since the proposed members are already among the most open in the region. And most important, embarking on negotiations with this group would provide a convenient excuse for Malaysia and others to revive Asia-only schemes, as evident in the recent flurry of activity among the ASEAN Plus Three.

The Bush administration appears to be pursuing separate U.S.-Australia and U.S.-Singapore trade agreements, but has yet to articulate the overarching strategic rationale. It is difficult to see how any such initiative could advance U.S. strategic objectives, provide meaningful liberalization in the Asia-Pacific region, and goad others to follow suit rather than go off on their own if it does not include a sizeable Asian security ally, such as South Korea or Thailand. However, skeptics might legitimately question whether the political hurdle for a more meaningful initiative along these lines could be met.

No trade strategy can prevail abroad without broad support at home. It would be a serious mistake for the Bush administration to pursue a partisan “trade promotion” or fast track bill that shuts off debate on the legitimate concerns of many Americans. To the contrary, President Bush has a unique opportunity to gain Congressional support on trade by pursuing a triangulation strategy. Achieving House passage of pro-trade legislation has been difficult in recent years because of a growing bloc of trade opponents within the Republican caucus and the reluctance of the House leadership to make the compromises necessary to attract a compensatory number of Democrats (the China PNTR vote succeeded in part because key concessions were made). But a Republican president could change that dynamic: President Bush likely would retain support from much of his own caucus in the House and gain the support of many Democrats by demonstrating a genuine commitment to address concerns on labor and the environment. A narrowly partisan approach would surely fail: Even if House Republicans could muster a degree of unity comparable to that on the tax bill—which is dubious—the newly Democratic Senate will be seeking to stake out separate ground, especially in the wake of the divisive tax cut vote.

Even the most orthodox economists acknowledge that although trade expands the overall pie, there is no guarantee the gains will be equitably shared. Not only do the less skilled fare poorly on a relative basis, but many who lose their jobs may take years to find employment at comparable pay. Thus, any serious effort to gain support for trade liberalization must at a minimum include expansion and reform of adjustment assistance for dislocated workers (although this will by no means be considered sufficient for trade opponents, who deride it as “burial insurance”).

Second, any serious effort must grapple with the ongoing crisis in the steel industry. The Bush administration has self-initiated safeguards action—the first such action in fifteen years—and vowed to hold negotiations aimed at reducing international steel capacity. The safeguards action provides some degrees of freedom on the domestic politics of trade; however, the net effect for the overall trade agenda is hard to predict, depending on the intensity of the backlash from key trading partners.

Third, labor and environmental standards must be addressed. Americans want trade to be a force for rising living standards and human dignity both here and abroad. Unfortunately, the current debate suffers from a serious lack of trust among the main protagonists.

In the United States, a fabric of social protections was woven together over the course of several decades as the national economy grew increasingly integrated. These in turn made an integral contribution to the development of a mass middle class and sustained prosperity. But these protections emerged from an evolutionary domestic process; they were not imposed externally. The question today is whether globalization makes it more difficult for individual developing countries to evolve such a safety net because of a harmful race-to-the-bottom dynamic, especially in “footloose” industries such as textiles and footwear, where a global floor could be helpful.

We are in the early stages of understanding the linkages between labor standards and trade. At the multilateral level, the first step is to establish a dialogue to promote common understanding, but even this is contentious. Many developing countries oppose housing such a dialogue at the WTO because they fear it will be the first step on a slippery slope to trade sanctions since the WTO is notable among international institutions for its binding dispute settlement mechanism. On the other side, proponents of labor standards worry that relegating this issue to the International Labor Organization (ILO) would gut it, since the ILO lacks effective enforcement mechanisms. The obvious middle ground is a dialogue shepherded jointly by both institutions.

More broadly, the rush to judgement on trade sanctions makes it too easy for opponents to deny the legitimacy of the labor standards debate. There are a variety of constructive proposals to advance the “core” labor standards—those that are considered human rights and independent of the level of development, such as freedom of association and freedom from forced labor. Rather than resorting to punitive measures in the first instance, richer nations could provide resources to help committed governments in the poorest nations improve observance of core labor standards, including through programs such as the International Program to Eliminate Child Labor, which address the root causes of abuses. They could provide additional preferential trade access as an incentive for poor countries to strengthen enforcement. There is also significant scope for annual report cards and corporate codes of conduct to help businesses invest responsibly and to facilitate coordinated consumer action, as have been introduced in industries such as textiles, rugs and soccer balls. When pursuing deeper integration with middle-income countries whose laws enshrine the core labor standards, a broader set of mechanisms could be contemplated to monitor and encourage implementation and, if necessary, punish systematic trade-related evasion. U.S. negotiators could also work systematically to identify shortcomings at the outset of trade negotiations and integrate remedial steps into the overall negotiating framework. The recent requirement for environmental reviews of major trade agreements is a useful step.

The Bush administration has indicated an intention to pursue fast track or “trade promotion” authority this year. Considering that fast track authority is a tool and not an end in itself, this is a risky gambit before there are concrete benefits to galvanize supporters. It makes the case for a triangulation strategy all the more compelling. The worst scenario is that the administration pursues a partisan fast track bill that is polarizing on the issues of labor and the environment, lacks sufficiently concrete near-term benefits to motivate supporters, and holds hostage completed trade agreements. Further evidence of polarization here at home would risk serious paralysis and loss of leadership abroad.

The three-step strategy above holds out hope for an ambitious trade agenda in the face of challenging political and international constraints. To succeed, a tremendous amount of groundwork must be laid, making a compelling case for trade at home, articulating concrete trade negotiating priorities as part of an overall strategy, engaging with bipartisan Congressional members and representatives of business, farm, consumer, labor and environmental groups, and building coalitions with key trade partners around the world. At the moment, there is little evidence that the requisite groundwork is being laid abroad or at home by the Bush administration, with the lonely exception of the U.S. Trade Representative. If this continues, the United States simply will not be ready to forge agreement on a Round agenda in time for the November WTO ministerial in Qatar. Come next year, it would be a great shame if the United States finds itself drifting into a handful of piecemeal agreements, selected not because of their strategic value but because their political and diplomatic cost is low.