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Speeches and Papers

Global Trade and American Politics

by C. Fred Bergsten, Peterson Institute for International Economics

Reprinted with permission from The Economist
September 27, 1997

© The Economist

America and the World

The future of the world trading system will be largely determined in the US Congress over the next few months. After three years of dithering, President Clinton has launched an intensive effort to obtain new “fast track” negotiating authority that would enable the United States to resume active participation in regional and global trade negotiations. The American outcome will be decisive for the international trading order for four reasons.

First, the United States remains the only plausible leader of far-reaching trade initiatives. As recently as 1993-94, the Clinton Administration dramatically reinforced that traditional American role by galvanising the final global agreement on the Uruguay Round in the GATT, concluding NAFTA, and winning political commitments to achieve free trade in the Western Hemisphere and the Asia Pacific. Using residual negotiating authority that carried over from the round and building on previous domestic legislation, the Administration drove to completion the recent worldwide agreements to eliminate tariffs on information technology products and to liberalise telecommunications services — the two main global advances since the end of the round in 1993. The European Union (EU), which is the only other potential global leader, will be too preoccupied with creating the euro and expanding its membership to provide leadership of world trade for some time.

Second, the trade policy credibility of the United States will totally evaporate if it sits on the sidelines for the next four years—the minimum result of a failure to win new negotiating authority. The United States led the agreement of the 34 democracies in the Western Hemisphere to create a Free Trade Area of the Americas (FTAA). The United States turned the Asia Pacific Economic Cooperation forum (APEC), whose 18 members comprise half the world economy, into a substantive organisation by initiating annual summit meetings in 1993 and supporting its agreement to achieve “free and open trade and investment” by 2010 (for its industrialised members ) and 2020 (for the rest). The United States insisted that the World Trade Organisation agree to resume negotiations on agriculture, services and other central issues by 2000. American withdrawal from these initiatives would doom them all, threatening a reversal into protectionism.

Third, American leadership has been crucial in assuring the compatibility, indeed the complimentarity, of regional and global liberalisation. Some purists have condemned the United States for deviating from the exclusive pursuit of multilateral agreements. But American strategy has promoted regional arrangements (starting with its pact with Canada and extending through NAFTA to the current FTAA and APEC initiatives) partly to press the more inward-looking EU and others to move ahead on the global path. Now that so many regional arrangements are in place or underway, America's defection could throw the whole process into reverse. Key groups—the EU, Mercosur and perhaps some new Asian groupings—could forget the global track and bring to life the much feared nightmare of a world of hostile trade blocs.

Fourth, American trade policy itself could suffer irreparable harm from a failure of the current legislative effort. The United States is in its seventh year of expansion with unemployment and inflation at their lowest in decades. Its chief competitors in Europe and Japan remain mired in prolonged slumps. President Clinton was decisively re-elected a year ago and remains extremely popular. If the United States cannot pursue trade liberalisation now, when will it ever be able to?

A failure, or a severe limitation on the use of new authority (e.g., to add only Chile to NAFTA), would represent a stunning victory for organised labor and others that oppose globalisation. Such a victory would be led by Congressman Richard Gephardt, the minority leader of the House of Representatives, and a likely presidential candidate in 2000. The United States has not had a protectionist President for a century (though Ronald Reagan's wrong-headed macroeconomic policies produced a spate of new import quotas) but such an outcome is by no means impossible if the present debate were to misfire. The countries that have taken out insurance policies against a US reversion to protectionism via free trade agreements, Canada and Mexico, have not idly overcome their historical aversions to getting into bed with their superpower neighbor.

The Global Impact

Would all this be so serious for the rest of the world? After all, the United States is no longer hegemonic in economic terms. Its share of world output has dropped below a quarter and its share of trade is even less. The EU is larger on both counts and the creation of the euro will end America's monetary dominance. Moreover, globalisation has enormous momentum. Big trade agreements have been proceeding without America. The EU brokered an interim financial services agreement in 1995 when America chose to stay out, is expanding its membership and heading toward mostly free trade with its Mediterranean neighbors by 2010, and is pursuing agreements with Mercosur and Mexico. Subregional pacts such as Mercosur and the ASEAN Free Trade Agreement are moving ahead. Canada and Mexico have concluded their own free trade agreements with Chile.

All these deals hurt the United States, by creating or threatening discrimination against it,—but this is nothing more than turnabout for America's own preferential compacts. The global problem is that American disengagement would puncture, and probably destroy, the prospects for consummating the extraordinarily promising scenario for world trade that has evolved since the end of the Uruguay Round and is now poised to proceed. That scenario has two related elements.

The first is credible implementation of the two huge regional free trade agreements launched in 1994, the FTAA and APEC. Their conversion from political pledges to practical realities would provide huge new reductions of trade barriers. It would also bring irresistible pressure on the EU and others to avoid the risk of facing costly discrimination by joining a new global liberalisation initiative.

APEC is particularly crucial to this strategy. Because of it's size, its pledge in 1994 to achieve free trade in the region is potentially the most far-reaching economic agreement in history. At the same time, its devotion to “open regionalism” means that it will offer to extend its liberalisation to non-members. The EU has always said that “it will not be left behind if APEC does what it says it will do,” as was indeed the case with the Information Technology Agreement (ITA) a year ago. APEC thus dramatically magnifies America's own effort to continue reducing global barriers.

The second element in the global scenario would then be a major new effort in the WTO, perhaps the “Millennium Round” called for by Sir Leon Brittan or at least a simultaneous “round-up” of key issues as proposed by my colleague Jeffrey Schott. As in the past, rounds or round-ups that include a number of issues and sectors will be needed to meet the diverse interests of the full WTO membership and permit the necessary tradeoffs across topics that produce far-reaching liberalisation. It is true that the ITA and the telecommunications agreement represented victories for the sectoral approach but talks on maritime services collapsed and the outcome of the current renewed effort on financial services is unclear. A broader approach will almost certainly be required to provide substantial global progress.

Once all the regional arrangements are on their way to being realised, about two-thirds of world trade will in fact have achieved, or be headed toward, barrier-free status. The WTO membership would then recognise that global free trade was a practical reality and guide the next round(s) by setting an explicit goal of reaching that milestone—perhaps by 2010 on the APEC and Euromed models. The WTO's director-general Renato Ruggiero, the Canadian government, and the declaration of the WTO's ministerial conference in Singapore last December have all already endorsed variants of that prospect.

In addition, this scenario would decisively counter the risk that the regional pacts will become sources of new international conflict. Mr. Ruggiero has put it nicely: regionalism will undoubtedly continue to proliferate so the issue is whether the groupings go off on their own, with possibly disastrous consequences, or increasingly fuse into a common global context that eventually wipes out their preferential features. The latter outcome is obviously superior but the chances of reaching it would be severely jeopardised by a prolonged period of American inaction.

There would be even bigger cost to the world from a failure of the Clinton fast-track effort: an enormous boost to the backlash against globalisation. Such a backlash is evident almost everywhere, from striking workers in France to the tirades of Malaysia's prime minister against international investors. There is some justice in the complaints. On balance, globalisation is clearly good for every country, but many governments have been slow to erect the necessary domestic complements. Without adequate safety nets to cushion adjustment burdens, and worker training that will convert potential losers into winners who can take advantage of the better jobs and higher wages that become available, political support for globalisation may be impossible to sustain.

In this environment, victory for the anti-globalisation forces in the United States could have terrible global consequences. Defensive reactions would surface almost immediately, especially in the Asian and Latin American countries that depend most heavily on the American market. China, Russia and others could lose interest in further liberalisation and joining the WTO. A half century of global economic opening could stall or even be thrown into reverse.

The broader international credibility of the United States would of course suffer severely as well, with substantial implications for international politics and even global security. It would be impossible for America to withdraw from such a central component of international affairs, or indeed repudiate initiatives undertaken with great fanfare by its own president and his predecessors, without jolting confidence in its staying power in other respects.

Doubts about a sustained American presence would become particularly acute in Asia, where security considerations are a central (if largely unspoken) rationale for APEC, adding to future risks in the world's most volatile region. It would be the ultimate irony if “the only remaining superpower” entered the twenty-first century with a policy of disengagement on the very issues which most of the world, with the end of the Cold War, now places at the top of the international agenda.

The Outlook

International considerations aside, the case for Congressional passage of new negotiating authority is overwhelming from a narrowly American standpoint. Exports have generated one third of all economic growth in the United States over the past decade. Export jobs pay 10-15 percent more than the average wage so a further shift of American production into exports would help counter the stagnation of incomes that has been our central economic and social problem for a generation. Global competition has played a major role in checking inflationary pressures and thus enabling the United States to achieve much lower levels of unemployment, without foregoing price stability, than anyone envisaged just a few years ago.

Moreover, the United States has already eliminated most of its trade barriers so little can be lost from further trade agreements, in the way of jobs or lower wages, whatever one thinks of their past results. (The remaining barriers, notably high textile and agricultural tariffs, can be phased out over prolonged periods as in NAFTA.) By contrast, the huge and rapidly growing nations of Asia and Latin America retain extensive controls. Hence any moves toward regional or global free trade will primarily benefit the American economy by providing additional impetus to exports.

But the NAFTA debate in 1993 provides a stern warning. The Congressional vote on it should have been trivial: NAFTA amounted to a 4% expansion of the American economy, to include a country that accepted virtually every demand placed upon it in the negotiations and which made virtually all the concessions. The result, however, was the fiercest battle over trade in the United States since the Smoot-Hawley tariff. The vote was almost lost.

Even more important, a large majority of the American public views NAFTA as a huge loser for the United States—despite the fact that the peso crisis, which had nothing to do with NAFTA, caused the sharp deterioration of America's trade balance with Mexico and despite the fact that NAFTA protected both the United States and Mexico itself against a Mexican protectionist relapse. “NAFTA” has in fact become a dirty word in Washington.

Both President Clinton and Robert Dole, who supported the agreement, banished trade from the campaign debate (and policy agenda) in 1996. No one talks any longer of “extending NAFTA” even to Chile, referring instead to “a new free trade agreement” with that country (and perhaps several others). Opponents of any further trade agreements seek to tar the entire process with the NAFTA brush. When I testified before the Senate Finance Committee on fast track in June, all 18 Senators present indicated their support but 16 said their voters disagreed and that they were not sure how long they could continue taking a different stance.

One key requirement in the debate will thus be to distance the new negotiating authority from NAFTA. Moreover, the remnants of American protectionism will not yield easily. Textile, apparel and agricultural interests cling to their remaining tariffs. Antidumping procedures, and other forms of process protectionism in America, which cause such consternation around the world, are fiercely defended by the industries they protect, their lawyers and their Congressional supporters.

The deeper problem is that “NAFTA” and “new trade agreements” represent a convenient proxy for the vast impersonal forces of the contemporary global economy that continue to produce deep anxieties in many Americans, notwithstanding the length and depth of the current expansion. White collar and professional, as well as blue collar and unskilled, workers share these insecurities. The US Government has been weakening its already-inadequate safety-net just when increased support is needed to alleviate fears of displacement. Better education and training are of course the constructive answers to the problem but, despite valiant efforts on the part of the Administration, our educational system is highly decentralised and will take many years to repair, and virtually all the government's training efforts to date have failed miserably.

Nor has the Administration covered itself with glory. After brilliantly implementing, and to some extent augmenting, the trade strategy inherited from Reagan and Bush in 1993-94, it fell into a series of largely unproductive bilateral bashings. It ran from trade throughout the Presidential campaign in 1995-96 and has been slow to restart the process—giving opponents a long head start, the same mistake that almost cost it the NAFTA vote in 1993.

Its trade officials have done the best they could without new authority, negotiating the information technology and telecommunications pacts, but have focused on narrow sectoral and bilateral opportunities rather than pursuing the big-picture initiatives (such as a new “Clinton Round” in the WTO and “global free trade”) that have historically captured public imagination and thus galvanised political support in the United States. The White House has strained relations with its strongest trade supporters, the business community, dithering endlessly with trivial issues like international labour standards that could provide only the tiniest help for their purported beneficiaries. The Treasury Department has increased the difficulties by promoting an excessively “strong dollar” that undermined American competitiveness and has pushed the trade and current account deficits to record levels of nearly $200 billion.

The outcome is thus uncertain as well as pivotal. In the end, the United States usually gets things right. But it often makes major and costly mistakes along the way. The entire world has an enormous stake in this one. It should be watching very closely as the drama unfolds, and making every effort to support a constructive outcome by indicating its clear willingness to proceed along a constructive course if the United States is enabled to play its full part. Any other outcome would be enormously costly to the world as a whole as well as to the United States itself.